Thus far this year, new-issue auto rental fleet lease ABS is picking up as anticipated. With Hertz Rent-A-Car having completed its inaugural term securitization last week, the market has seen three issuers price deals. At least three more deals are still ahead.

Last Wednesday, Hertz priced $600 million of a series 2004-A transaction via Lehman Brothers, backed by a full MBIA wrap. The 2.5-year triple-A rated fixed-rate notes priced to yield 12 basis points over comparable swaps, with the 2.5-year triple-A floater pricing at nine basis points over one-month Libor.

Demand for auto fleet rental is currently strong, as evidenced by increases in the two most recent transactions - from Hertz and Vanguard Rental's ARG Funding auction- rate deal that priced Feb. 12. The market still expects Vanguard and Avis Rent-A-Car's AESOP Funding to issue again in the second half of the year, while Dollar-Thrifty Rent-A-Car is seen tapping the market for the first time since 1995.

Total issuance year-to-date sits at just under $2 billion, with $1.5 billion to $2 billion expected in the remainder of the year. Should supply total the higher end of the range, it would top 2003 volume levels, which came in at $3.6 billion, according to Moody's Investors Service. Issuance this year is being driven by an increase in rental fleets, refinancing needs on the part of issuers and the strong investor demand for the greater yields in the sector.

The sector has seen numerous innovations over the past year which have proven the reliability of the cashflows amid financial difficulties facing many parent companies in the industry. ARG Funding, formerly ANC Rental, securitized out of bankruptcy last year and completed an auction-rate transaction this year.

Also, the travel industry has rebounded, and car rentals have followed suit. "Rental car transaction volume is directly correlated to air travel, which has generally increased, on a seasonal basis, since mid-2003, coinciding with the end of the Iraq war and the end of the SARS outbreak, noted Phil Walker, an unsecured-credit analyst at Fitch Ratings. "The real challenge facing the car rental companies in 2004 will be their ability to raise prices and avoid discounting," he added.

Hertz tapping the market, however, is a move toward most rental companies, which tend to rely on securitization as the sole source of liquidity. In addition to its new access to the ABS market, Hertz has a $1 billion conduit facility, set up in September 2002, via Banc of America Securities and JPMorgan Securities. As a relatively strong seller/servicer, with an investment-grade debt rating, Hertz also has access to the corporate debt markets and has roughly $7.8 billion in unsecured debt outstanding, noted Fitch's Walker.

"Hertz has historically been an unsecured borrower; Hertz' decision to issue a limited amount of ABS is viewed favorably as it expands the company's investor base and is an additional source of liquidity," Walker added.

Moody's senior analyst Rochelle Tarlowe, who does not expect Hertz to return in 2004, also noted that Hertz had not securitized its entire fleet, as many of its competitors have.

Moody's sees the increased trend of manufacturer repurchase programs, which Hertz has in place with parent Ford Motor Co., as including the absorption of the residual value risk of the vehicles by the manufacturer. Avis and ARG Funding each have similar agreements with respective parent companies Cendant Corp. and Vanguard.

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