The Hertz Vehicle Financing III LLC master trust is preparing to issue about $800 million in auto asset-backed securities (ABS) through the 2022-1 and 2022-2 issuances, and use the proceeds to support Hertz’s global car rental brand.
Collateral to repay bondholders will include Hertz’s lease payments, the aggregate net book value (NBV) of underlying leased vehicles that eventually get put up for sale, and rebate receivables from incentive and manufacturer rebate programs.
Moody’s Investors Service noted several credit strengths that should benefit the notes. One is the Hertz brand itself and another is its commitment to continue making least payments on its fleet of cars. In an auto market where vehicle supplies remain constrained, and another strength is that underlying collateral is highly liquid.
Used vehicle prices have increased substantially recently, due a shortage of semiconductor chips, which has constrained the supply of new vehicles and increased demand for used vehicles, the rating agency noted.
The notes also benefit from several forms of credit enhancement, including subordination, overcollateralization and liquidity reserves, Moody’s said. The rating agency expects to assign ratings ranging from ‘Aaa’ on class A notes; ‘A2’ on the class notes; ‘Baa2’ on the class C notes and ‘Ba2’ on the class D notes.
Hertz Vehicle Financing, 2022-1 and 2022-2 is not without its challenges. Moody’s notes that Hertz does not have an investment-grade rating. The company is the deal’s sponsor and the primary lessee. The main risk to the repayment of notes is that Hertz will not be able to recoup enough funds, through used vehicle sales, to fund the payments. Also, the car rental industry is heavily dependent on air travel, both business and leisure.
“The spread of new variants will weigh on new bookings, temporarily slowing the pace of the industry’s recovery towards 2019 levels,” Moody’s analysts wrote in the presale report.
If Hertz misses a lease payment to the ABS transaction and a liquidation period follows, the market value of the vehicles could continue to depreciate relative to their NBV.
