Avis' next rental fleet securitization has even fewer program vehicles

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Avis Budget has further reduced the concentration of program vehicles in its next rental-car fleet securitization, as it has over numerous transactions.

Just 28% of vehicles backing the $400 million Avis Budget Rental Car Funding Series 2019-1 come with repurchase agreements from the manufacturers, including Ford, General Motors and Chrysler, that insulate Avis Budget from the risk that they will depreciate more than expected. By comparison, 34% of collateral for Avis Budget's prior deal consisted of program vehicles. The latest decline is part of a long-term trend; in the past, program vehicles have accounted for as much as 80% of collateral pools.

Moreover, the concentration in the latest pool could fall as the collateral will revolve over the three-year life of the deal. It can fall to as low as 15%.

Moody’s Investors Service cited this as a credit concern in its presale report, noting that rental car companies absorb the risk of vehicle depreciation and resale values on non-program vehicles.

Fitch Ratings, which is also rating the deal, noted that Avis has "consistently shown residual gains" in vehicle dispositions in comparison to their net book value, aided by better-than-expected resale values for used cars in recent years.

Nevertheless, Fitch and other ratings agencies have expressed concerns that used car prices could fall in 2019 and 2020 due to a large supply of off-lease vehicles coming into the wholesale market.

Three tranches of notes will be issued in the deal: $329.6 million Class A tranche with preliminary triple-A ratings from Fitch Ratings, DBRS and Moody’s; $38.4 million of Class B notes rated single A; and a $32 million of Class C notes rated triple-B. All of the notes are due in 2022.

Despite concerns about the resale value of non-program vehicles, credit enhancement levels for the senior notes are down slightly from Avis Budget’s transactions in 2018 and 2017. The latest deal benefits from dynamic credit enhancement that will range from 27.33%-35.75%, compared with 28.12%-36.22% for Series 2018-2 deal and 28.38%-36.14% for Series 2018-1 deal, according to Fitch.

The dynamic credit enhancement levels change based on the composition of the fleet, with credit characteristics that vary based on the corporate ratings of automakers as well as the percentage of program vehicles acquired through a manufacturer's dedicated fleet sales program.

Fitch expects losses over the life of the deal to be 16.77% of the original principal balance, based on the composition of the initial pool; however, that could rise to 33.86% in a worst case involving a high level of residual value loss to the fleet.

In addition to the credit enhancement, the senior notes benefit from an amortization trigger; in the event that net book value falls out of parity with market values of used vehicles, funds will be diverted to pay down principal of the notes to be issued.

The notes are funded through proceeds of rental fleet revenue, vehicle dispositions and refinancings. In an unusual structure often used in rental fleet securitizations, the note proceeds are used to fund loans issued by two purchasing entities established by the trust (AESOP Leasing LP and AESOP Leasing Corp. II) to acquire vehicles and lease them to Avis Budget Car Rental LLC, which in turn subleases the autos to the firm's various rental operations.

Avis Budget rental fleets ranged on average between 534,000 and 721,000 vehicles monthly during 2017.

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