Hertz needs to invest heavily in realigning the size and composition of its rental fleet and upgrading IT systems.

So far, the securitization market has been very accommodating.

In January, the rental car giant issued $1.13 billion of Series 2018-I of five-year notes from its revolving master trust, Hertz Vehicle Financing II LP. Now its seeking another $426 million of rental fleet financing, consisting of $213 million each of notes maturing in July 2021 and July 2023, according to rating agency presale reports.

The trust, a bankruptcy remote, special-purpose vehicle, owns a fleet of 464,842 vehicles with an average age of 10.3 months (as of March 31), which it leases back to Hertz. The collateral includes vehicles rented not only under Hertz’s brand name, but also under the brand names Dollar Thrifty and Firefly.

The lease payments, along with proceeds from sales of vehicles and refinancings, are used to pay interest and principal on the notes. HVF II has some $9.26 billion of notes outstanding, including the $1.13 billion of Series 2018-I five-year notes issued in January, according to Fitch Ratings.

The Series 2018-II and Series 2018-III are each divided into five tranches of notes. Fitch, Moody’s Investors Service and DBRS all expect to assign triple-A ratings to the senior tranches; only Fitch and DBRS will rate three subordinate tranches. Hertz will hold onto the most subordinate tranches in order to comply with risk retention rules.

Barclays is the structuring lead and joint bookrunner for both transactions.

One of the primary ratings drivers is the risk that Hertz, which carries a below-investment- grade rating of B2 by Moody’s (and is not rated by Fitch) could file for bankruptcy and default on its lease. However, both rating agencies expect that Hertz would have a strong incentive to affirm the lease in a Chapter 11 bankruptcy, since the collateral backing the notes represents the majority of its U.S. fleet.

Should Hertz reject the lease in bankruptcy, the main risk is that the securitization trust cannot raise enough money by selling the vehicles to repay the notes.

Credit enhancement is primarily overcollateralization; the value of the vehicles exceeds the principal of notes outstanding. This collateral includes both program vehicles and non-program vehicles. Program vehicles benefit from an agreement by the manufacturer to repurchase a vehicle that depreciates more than expected.

“The credit enhancement level fluctuates over time with changes in fleet composition,” Fitch notes in its presale report. “It increases if the proportion of non-program vehicles increases or if the proportion of program vehicles from lower credit quality manufacturers increases.”

The rating agency takes comfort from the fact that the collateral has a “high degree” of diversity by manufacturer, model, segment and geography. “Concentration limits, based on a number of characteristics, are present to help mitigate the risk of individual [manufacturer] bankruptcies or failure to honor repurchase agreements,” the presale report states.

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