With notes that are expected to expire in just four years, Avis Budget Car Rental is sponsoring a $250 million asset-backed securities (ABS) transaction secured by a single lease on a fleet of vehicles that Avis Budget Group uses in its rental car business.
AESOP Leasing and AESOP Leasing Corp are the special purpose vehicles that own the leases, according to a pre-sale report from Moody’s Investors Service. Avis Budget Rental Car Funding (AESOP), Series 2022-3, will repay the notes from revenue generated from a combination of lease payments from Avis Budget Car Rental, vehicle sales and refinancing proceeds.
J.P. Morgan Securities is among a group of lead underwriters that includes BofA Securities, BNP Paribas, RBC Capital Markets and Truist Securities, Moody’s said. Notes will be issued from a senior-subordinate capital structure, and “dynamic” credit enhancement in the form of overcollateralization and a liquidity reserve, something that Moody’s considers a credit strength.
In one aspect of credit enhancement, analysts say that the credit enhancement level will change with the fleet composition. An increase in non-program vehicle leases, or the proportion of program vehicles from non-investment grade leases will increase credit enhancement, analysts note. The dynamic credit enhancement buckets for the series 2022-3 notes are higher than those for series 2022-1, Moody’s said.
The deal covenants requires that a 5.6% credit enhancement level for program vehicles and 9.1% for all other program vehicles, for eligible manufacturers rated at least Baa3, Moody’s said.
Moody’s expects to assign ratings to four classes of notes, ranging from ‘Aaa’ on the $178 million, class A notes to ‘Ba2’ on the $30 million, class D notes.
While credit enhancement is certainly a plus, the deal’s primary form of credit enhancement is overcollateralization, driven by the vehicles themselves. Generally, the used car wholesale market can support sales of about 40 million vehicles annually. The ongoing semiconductor chip shortage is delaying manufacturing and delivery of new cars, however, maintaining all-time high prices for available used cars for sale, the rating agency said.
The deal does have a number of credit challenges, however, mostly involving a lack of broader vehicle diversity in its fleet. The rental fleet is concentrated among just a few manufacturers. Also, the residual values from a bankrupt manufacturer would decline substantially, Moody’s said.
Also, AESOP 2022-3, the trust will be able to add more Tesla electric vehicles to its fleet over time, thanks to a collateral pool concentration limit of 15%. Moody’s cites uncertainty around the residual value of Tesla EVs.
The notes have an expected final payment date of February 2026, with a legal final maturity of February 2027.
