After a court confirmed Hertz Global Holdings’ debt reorganization plan in connection with a Chapter 11 bankruptcy, Master trust Hertz Vehicle Financing III LLC, is set to issue $2.2 billion in asset-backed securities, ABS, through Series 2021-1 and 2021-2.
Hertz Vehicle Financing III LLC, is a direct subsidiary of Hertz Corporation, which will use the proceeds to pay off outstanding principal from notes issued from two earlier series, Hertz Vehicle Financing II LP and HVIF. With the other proceeds, Hertz will buy or refinance debt on vehicles for use in its rental business.
The asset securitization deal will test the resilience of structure’s credit mitigation measures, considering Hertz dependence on the fortunes of the air travel business, hard hit by the COVID-19 pandemic.
Hertz, the deal’s sponsor, has a B3 rating with a stable outlook from Moody’s Investors Service. The rating agency noted that the company could fall behind and even default on its lease payments, posing a risk to the repayment of the asset-backed securities. If a default happens, the issuer is contracted to raise funds and fully repay the notes by disposing of the vehicles, according to Moody’s. If the funds raised are not enough to repay the notes, then a backup disposition agent is in place.
Hertz announced that its plan will eliminate more than $5 billion of debt, including all of Hertz Europe's corporate debt, and will provide more than $2.2 billion of global liquidity to the reorganized company, according to a statement from the company earlier this month. Hertz also will emerge with a new $2.8 billion exit credit facility consisting of at least $1.3 billion of term loans and a revolving loan facility. The plan also includes an asset-backed vehicle financing facility of approximately $7 billion. All of the elements were negotiated on favorable terms.
Further, the debt reorganization plan provides for the payment in cash in full to all creditors and for existing shareholders to receive more than $1 billion of value.
Yet the deal has several key strengths. Demand for air travel is growing, and Moody’s foresees healthy daily rental rates and robust used vehicle prices through 2021. These business conditions should support the car rental industry, and the ABS, eventually.
Despite hiccups among global air travel carriers – such as American Airlines cancelling 1,000 flights due to a labor shortage – growth in this area will gradually bolster rental car demand. Moody’s expects widespread increases in air ravel starting in the second half of 2021 and accelerating through 2022.
