The Hertz Corp. is preparing two as-yet unsized offerings of bonds backed by rental car fleet financing, according to rating agency reports.
Hertz Vehicle Financing II LP, Series 2016-1 will issue four classes of notes maturing in March 2019 and the Series 2016-2 will issue four classes of notes maturing in March 2021. The senior tranche issued by each trust is rated triple-A by both Fitch Ratings and DBRS.
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 back to the rental company. 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 II, the collateral consists of a revolving pool of cars leased by either Hertz or Dollar Thrifty Automotive Group.
Hertz is also the servicer, guarantor, nominee-servicer and administrator of the trust.
Barclays is the lead arranger.
For Fitch, a key ratings driver is the diversity of the Hertz’ rental fleet. The rental car company enters into buyback agreements with automakers to repurchase many of the vehicles in its fleet at a predetermined price. Some 44% of the vehicles in its fleet are in repurchase programs. Having a diverse exposure offset the risk of a default by any one manufacturer. The biggest exposure is to General Motors (29%), followed by Chrysler (18.8%), Nissan (16.4%), Toyota (14%) and Hyundai (7.3%).
The fleet is also diversified by model, segment and geographic location. The average age of the vehicles is 10 months.
DBRS’ ratings analysis also focuses on the cars that Hertz sells in the used vehicle market, rather than back to manufacturers; this represents some 56% of its fleet. Used car prices have been strong in recent years, but are expected to stabilize or even decrease slightly. Nevertheless, DBRS expects industry fleet costs for the 2016 model year to roughly in line with costs for the 2015 model year.
In its presale report, DBRS notes that Hertz has significantly expanded its disposition channels beyond wholesale auctions, allowing it to realize proceeds above wholesale vehicle values. Hertz increased its used car retail sales network to 77 locations in 2014.
