Budget Group Inc., parent company of Budget Rent A Car, failed to make a $18.5 million payment on its outstanding senior debt notes on Monday, April 1.

On Tuesday the company announced a recapitalization initiative, and is perusing a deal with private equity investors. The company is also trying to renegotiate the terms of its debt with its senior note holders.

Budget has 30 days to make its debt payment or restructure its terms before the event would be considered a default, at which point a bankruptcy filing would be conceivable, a source familiar with the situation said. Budget has indicated it will file its 2001 10-K with the Securities & Exchange Commission on or about April 15. In a company release, Budget said the current circumstances should not affect the day-to-day operations, and Chief Executive Officer Sandy Miller added that the recapitalization would "put Budget on track for future financial success."

If Budget were to file for bankruptcy protection, the event would trigger early amortization in its outstanding securitizations, said Tom Reese, a director at Fitch. Other early-AM triggers include missed rent payments and significant deterioration in the company's ability to perform.

"We assume a liquidation of the collateral when we rate the deals," Reese said, noting that the deals are designed so that the liquidation would pay out full principal. The monthly rent payments are designed to cover the interest, carry cost and the depreciation on the collateral.

In late March, Standard & Poor's lowered its debt rating on Budget to triple-C from single-B. "The rating was lowered due to the company's deteriorating credit profile and weak financial flexibility resulting from lower volume in its car rental business caused by both the events of Sept. 11, 2001 and a weaker economy that has led to reduced levels of passenger travel," S&P said in a release.

Budget's debt rating has been falling since June 2000. In March 2001, S&P lowered Budget's debt to B+' from BB. Last Wednesday S&P lowered its rating on Budget to SD, or speculative default'.

Via Team Fleet Financing Corp., Budget has brought nine visible rental car securitizations to market since 1997, for approximately $3 billion. Budget's last deal, 2001-3, closed in November via Deutsche Banc.

Because the rating agencies do not exactly consider early amortization a credit event (but rather a protection mechanism), the threat of hitting a trigger does not necessarily throw the deals into watch, a ratings analyst said. However, because there is embedded corporate risk in the rental car fleet securitizations, as there is unavoidable servicer linkage, it is expected that all the Team Fleet deals will at least be placed on ratings watch if the threat of bankruptcy further materializes.

Fitch placed all of its rated Budget deals on watch in late September, and Moody's Investors Service downgraded several subordinate classes from the Team Fleet deals in early November.

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