Fitch downgrades $6B in Hertz ABS notes

Fitch Ratings on Tuesday sharply downgraded all of Hertz Global Holdings’ outstanding asset-backed bonds, amid growing doubts that the rental car company can pay off the notes in the event of a pandemic-driven bankruptcy.

Fitch downgraded $6 billion of notes across 11 issuances from 2016 through 2019, with all senior-note ratings taking a double-notch downgrade to single-A.

The subordinate notes in the 11 series also had downgrades of two steps or more, with all falling into high-risk, speculative-grade territory.

Fitch’s actions came a week after Hertz Global Holdings received forbearance and limited waivers on fleet lease payments that were due in late April on its outstanding ABS vehicle transactions. The company has until May 22 to make a $400 million payment to investors, as it negotiates with bank lenders and creditors to avoid a bankruptcy that could trigger a fire sale of used cars.

The company failed to make a $498 million payment due April 27 on the March collection period, an event that triggered early amortization requirements for Hertz to begin selling off its fleet of vehicles to pay towards the principal of the notes. But the forbearance agreement forestalled that obligation to liquidate, and Hertz in the interim made a May 5 interest payment to ABS noteholders, according to a regulatory filing.

“The rating actions encompass the unprecedented impact of the coronavirus pandemic on the travel sector, and [on] Hertz's operating cash flow generation threatening their ability to service the ABS notes,” noted a Fitch press release. The COVID-19 impact is also “driving Hertz's fleet depreciation higher and values lower in the past two months.”

Hertz has burned through more than $1.4 billion in cash since December as it deals with the economic shock of the coronavirus. The falloff in global travel has drastically cut demand for airport rental-car services, and a decline in used-car prices has made it difficult for Hertz to sell off excess vehicles.

The ABS payment deferrals set up a quandary for Hertz’ bank lenders, led by Deutsche Bank and Barclays, which must decide whether to allow Hertz to raise more money to pay ABS holders “or let it slide into bankruptcy,” sources told Bloomberg.

Although Hertz remains current on its non-ABS debt obligations, the ABS lease waivers have already prompted S&P Global Ratings to issue a selective-default downgrade to Hertz’ corporate debt issuer rating. Hertz, along with rival Avis Budget Group, had previously been downgraded by Moody’s Investors Service to Caa3 – the equivalent of a near-default triple-C rating.