As the aftershock from this spring's auto-sector implosion continues to roil the market, questions are starting to swirl about the stability of rental-fleet securitizations. The deals most in question are those in which General Motors and Ford Motor Co. have promised to buy back vehicles from the rental companies, as the financial strength of those manufacturers will dictate whether they have the buying power to honor their repurchase agreements. While that strength seems to be deteriorating rapidly, rating agency officials said there is little to worry about - for now.

Auto manufacturers often sell program vehicles to auto rental companies with the agreement to buy the vehicles back from the rental companies at a specified time. The agreements benefit the rental companies by alleviating the risk that they will be unable to get rid of the vehicles when they are no longer needed for renting. The agreements also benefit the manufacturers because the rental vehicles are a source of free advertising and guarantee them access to a consistent stock of their own used vehicles at a preset time and price.

In a worst case scenario, an auto manufacturer, such as GM, would go bankrupt and be unable to repurchase some or all of its program vehicles from a rental company, leaving fleet-lease ABS investors high and dry. Even a significant servicer downgrade could cause a downgrade and a sell-off of a particular company's fleet deals. Analyst say the market is far from such a situation, however, and most deals' ratings already reflect the risk of several degrees of servicer downgrades.

"We have started reviewing all the transactions that have concentrations of [GM and Ford] vehicles," said Moody's Investors Service Vice President and Senior Analyst Shorie Darnaby. When assigning ratings to rental fleet deals, Darnaby said Moody's runs a model that exposes the transactions to a range of ratings scenarios of participating auto manufacturers, in order to determine credit enhancement levels for the deals. So far there have been no ratings changes to any rental fleet deals related to problems at GM or Ford. Darnaby declined to comment on the likelihood of any

ratings changes.

Fitch Ratings Managing Director Mike Dean noted there is always an element of repurchase risk involved in rental fleet deals, but said that until the situation at a manufacturer becomes dire, investors are insulated from that risk. "We assume [the manufacturers] are around to honor their purchase agreements," said Dean. "Certainly a bankruptcy at a major manufacturer would test that."

GM has program vehicle arrangements with, most notably, Avis Group Holdings and Vanguard Car Rental USA, which owns both Alamo and National, both of which have arrangements with GM. Ford has relationships with Cendant Corp., which owns Avis and Budget Rent-A-Car, as well as Hertz, which it owns.

Copyright 2005 Thomson Media Inc. All Rights Reserved.

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