A 90% fall-off in air travel due to the COVID-19 pandemic has been harsh on the rental car business.
But the coming months could prove even worse for the likes of Hertz Corp. and Avis Budget Group.
Each is facing a a major cash crunch from the decline in revenues as well as the inability to downsize their fleets due to an unprecedented collapse in used-car prices.
Corporate and debt ratings for Hertz and Avis - including dozens of securitization notes - were downgraded by Moody’s Investors Service in late April, principally on the belief both companies could exhaust their available cash on hand due to an inability to sell off their excess inventory of vehicles with an unprecedented collapse in used-car prices.
Hertz, which burned through nearly $1.4 billion in available cash and revolver capacity it had in December, skipped April payments with lenders as it negotiated with them to reduce its obligations, according to Bloomberg.
Both firms will likely have to seek to relief from lenders – including asset-backed securities investors that make up the bulk of funding for both companies’ fleets, Moody’s stated in research reports.
Both companies’ weakened status from air travel reduction as well as fallen used-car prices (as much as 10%, according to Moody’s) were also compounded by downgrades to automakers, which provide the program cars to both companies’ fleets under repurchase obligations.
For Avis (rated B2 by Moody’s), the downgrade actions by Moody’s affected $6.3 billion in notes across 32 tranches - including several senior notes that were knocked out of Aaa status. Similarly, $4.3 billion in senior notes for Hertz’ ABS shelf were downgraded two notches to A1 from Aaa status (Moody’s only rates the senior notes of Caa3-rated Hertz).
Despite the downgrades, an April 29 Deutsche Bank research report indicates investors seem to be insulated from the fallout. “From a credit perspective, senior classes for both master trusts look well protected, with senior credit enhancement for [Avis] ranging from approximately 32%-39%, and 35%-39% for [Hertz],” the report stated.
Deutsche estimates used-vehicle prices would have to fall more than double the 16% rate of used-vehicle price declines in J.D. Power's bear-case scenario, in order for the senior classes to incur losses in either deal. And although Hertz still remains a “headline risk,” Deutsche’s report stated, a bright spot could be the recovery of wholesale auction markets (which improved to 30% of normal volumes in late April) in recent weeks that could aid both companies in the near future.
