The Hertz Corp. is planning a $300 million securitization of leases of fleets of auto and light-truck open-end leases.
It's the first time the company has tapped the market since completing a $400 million deal in April 2016.
Car rental companies rely on the asset-backed market to finance their inventories. They create bankruptcy remote trusts to purchase cars from manufacturers and lease them. To fund their purchases, these trusts issue notes that are secured by a lien on the vehicles. Lease payments from the rental companies and proceeds from the sale of older vehicles are used to make interest and principal payments on the notes.
In the case of Hertz Vehicle Financing 2017-1 II, the collateral consists of 94,287 leases to 381 obligors.
Moody’s Investors Service and DBRS both expect to issue triple-A ratings to the senior $266.7 million Class A notes, which are split into a fixed-rate and floating-rate tranche. All of the Class A notes benefit from 14.1% credit enhancement, consisting of 10.82% subordination, 2.56% overcollateralization and an initial cash reserve of 0.73%.
The vehicles in the collateral pool are almost all autos and light-duty trucks leased to companies; these types of leases typically xperience fewer defaults and delinquencies than leases to individuals. Sixty-day plus delinquencies have ranged between 0.04% and 0.63% for Donlen Corp., the Hertz subsidiary that services the fleet leases.
Donlen, which was acquired by Hertz in 2011, has approximately 205,000 vehicles under lease or management, according to a presale report published Tuesday by Moody’s. Those vehicles has an asset value of $1.33 billion, with an average securitization value of $17,383 per vehicle. The average maturity on leases is 53 months.
Because the collateral consists of open-end leases, the trust is not exposed to the residual value risk of the vehicles which lies with the lessees.
Compared to fleet lease deals by companies like Element Financial Group and Enterprise, Hertz’ pool of leases has a higher geographical concentration (Texas leases comprise 19.8% of the pool, compared to a 13% top level concentration in other peer lease deals).
Among the changes from the Hertz 2016 transaction, Moody’s stated there was a marginal negative credit impact on the pool due to a change to the concentration limits on leases non-investment grade obligors, as well as the removal of a minimum rating requirement on the largest obligor.
Donlen has drastically reduced its concentration among oil and gas companies in recent years. From 2013-2015, approximately 14% of the pool was with companies in the E&P field making it the largest industry concentration in that pool. For the latest transaction, business services is the top sector at 9.8%; oil and gas is 14th with that industry’s lease residuals making up only 3.2% of the pool.