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Avis proceeds with rental fleet ABS sans AAA bond status

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Despite a recent corporate issuer downgrade – and the lack of a triple-A bond rating – Avis Budget Car Rental is forging ahead with sponsorship of a new $500 million rental fleet securitization, according to a presale report from Moody’s Investors Service.

Moody’s assigned preliminary ratings to the Series 2020-2 notes, including an Aa1 (the Moody’s equivalent of highest AA status) for the bulk of the capital stack: a $417.5 million Class A notes tranche. Moody's also issued an A3 rating to a $42 million Class B offering and a Baa3 (equivalent to a BBB- from S&P Global Ratings and Fitch Ratings) to the $40.5 million Class C notes.

The Class A notes have an assumed 2.9% coupon pricing, above the 2.33% rate attained with Avis' most recent, pre-pandemic deal sponsored in February.

The Aa1 rating in Series 2020-2 matches that of the senior notes from approximately $6.3 billion in Avis' outstanding ABS deals. The senior notes in those deals were downgraded from their original triple-A ratings in April due to stresses on the company's revenues and liquidity from the economic impact of the coronavirus pandemic.

All the notes are issued by an indirect special purpose vehicle (SPV) of Avis Budget Car Rental – Avis Budget Rental Car Funding LLC (AESOP) – which serves as a master trust leasing the vehicles from two special-purpose vehicles.

Under typical arrangements for rental auto-fleet ABS deals, the notes will be paid from the lease proceeds from Avis to the SPVs, as well as proceeds from the resale of the vehicles at a later date. While fleets are crucial business elements for a rental car firm and Avis would be expected to affirm its lease obligations to the SPVs in the event of a bankruptcy, Moody's acknowledges these are not normal times for fleet ABS deals.

"While Moody's recognizes the strategic importance of the ABS financing platform to [Avis Budget Car Rental's] operation, the company's lease payment obligations to the trust are high, considering the relatively low utilization of the fleet and ABCR's need to continue to de-fleet in the second half of 2020," Moody's report stated. "In the event ABCR is unable to right-size its fleet relative to demand, its lease payments could continue to be a significant burden for the company."

While churning in new vehicles, Avis is also trying to reduce its fleet size through added vehicle sales that have benefitted from recent improvements in aftermarket used-car prices. But the company still had only a 33% utilization rate of its fleet vehicles in the second quarter, as low demand continues to hound the rental car industry, according to Moody's.

The Series 2020-2 collateral includes more than 383,000 rental vehicles, of which 86.4% are considered non-program autos. These vehicles lack the repurchase or guaranteed depreciation agreements held by program vehicles purchased directly from auto manufacturers. Avis and other rental firms such as Hertz Corp. in recent years have had increasingly reduced levels of program vehicles in ABS deals, exposing them to higher risk of vehicle depreciation and unknown future resale values.

Avis’ most recent deal in February included senior-note triple-A ratings from Moody’s, DBRS Morningstar and Fitch. But after the onset of the COVID-19 outbreak in March, Avis soon faced a revenue crunch as global travel fell by estimates of nearly 90%, and with it much of the demand for airport and off-airport vehicle rentals for Avis.

Avis and Hertz were both downgraded by ratings agencies this spring because of analysts' concerns that with the collapse of used-car prices, both would struggle to sell off excess inventory of vehicles to support dwindling cash reserves. Moody’s downgraded Avis’ corporate rating to its equivalent of single-B status (B2) from Ba3.

But while Hertz fell into bankruptcy, Avis has been able to offset its liquidity woes with additional high-yield bond offerings to investors. In June, Avis sold $500 million in HY bonds pricing at a hefty 10.5% coupon in April/March. Avis’ existing long-dated bonds soon recovered from their low price of 56 cents on the dollar. Avis is currently sponsoring a drive-by, $350 million corporate bond issuance as an add-on to an existing 5.75% senior notes series to retire $100 million in existing HY debt and general corporate purposes.

Moody’s recently affirmed Avis’ corporate and debt ratings, but maintained a negative outlook for the company. After the drive-by offering last week, S&P Global Ratings on Monday placed Avis’ “B+” issuer rating on watch for possible downgrade due to the mounting debt.

Barclays, BNP Paribas and Citigroup are lead bookrunners of the Series 2020-2 transaction.

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