Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) of Avis Budget Group, Inc. (ABG) and its debt-issuing subsidiary Avis Budget Car Rental, LLC (ABC) at 'B+'. Concurrently, ABC's secured and unsecured debt ratings have been upgraded as follows:
Avis Budget Car Rental, LLC
--Senior secured debt upgraded to 'BB+/RR1' from 'BB-/RR3'; and
--Senior unsecured debt upgraded to 'B+/RR4' from 'B-/RR6'.
The Rating Outlook has been revised to Positive from Stable. Approximately $2.8 billion of secured and unsecured debt is affected by these actions.
The affirmation reflects the strength of ABG's dual brand strategy, its leading position in the on-airport rental market, successful cost containment initiatives, improved access to the capital markets, and solid capitalization and liquidity for the rating category. Rating constraints continue to reflect the cyclicality inherent in the car and truck rental industry and the company's heavy reliance on secured funding vehicles, although unsecured corporate debt issuances have increased in recent years.
The upgrade in the debt level ratings reflect improved recovery prospects for secured and unsecured creditors given stronger corporate liquidity, lower leverage, a higher proportion of unsecured debt in the capital structure, and improved economics in the secured debt markets, as evidenced by better advance rates in asset-backed securities (ABS) and secured conduit structures.
The recovery rating of 'RR1' for the secured corporate debt reflects outstanding recovery prospects for debtholders in the event of default, while the recovery rating of 'RR4' for the unsecured corporate debt indicates average recovery prospects in the event of default.
The Positive Rating Outlook reflects ABG's ability to improve operating efficiencies, reduce leverage, strengthen liquidity, and maintain sufficient funding in a tough economic and capital markets environment. Additionally, Fitch believes the recent acquisition of Avis Europe is a good strategic fit which will strengthen the company's competitive position on a global scale while adding fleet and revenue diversity.
Positive rating actions will be driven by the company's ability to sustain recent improvements in operating performance, funding flexibility, and capitalization, in addition to an ability to integrate the Avis Europe acquisition and realize projected cost synergies. Fitch would view favorably the company's ability to manage net leverage within the company's articulated range of 3.0 times (x) to 4.0x longer term.
Conversely, negative rating actions could result from deteriorating global economic conditions, which yield meaningful declines in passenger travel volumes, hurting revenue and EBITDA generation and pressuring cushions on debt covenant ratios. A decline in ABG's competitive positioning, as evidenced by reduced market share, would also be viewed negatively by Fitch.
ABG's leverage, as measured by corporate debt to adjusted EBITDA declined to 4.78x at June 30, 2011, on a trailing 12 month (TTM) basis, compared to 6.33x at year-end 2010 and 10.91x at year-end 2008. Net of $645 million of unrestricted balance sheet cash, leverage improved to 3.54x compared to 4.03x and 9.34x at the end of 2010 and 2008, respectively. Adjusted EBITDA has benefited from a $139 million increase in vehicle gains in the first six months of the year compared the comparable 2010 period. Fitch expects vehicle gains will normalize over time, as used vehicle values decline from historical highs, but gains are expected to remain larger than pre-crisis levels, given the increased number of risk vehicles in the fleet. Additionally, Fitch believes an increase in rental volume and improved operating leverage will also help to offset declines in vehicle sale gains over time.
ABG's liquidity profile has also strengthened with higher unrestricted cash balances, improved access to the ABS markets, strong operating cash generation, and increased borrowing capacity on the corporate revolver and vehicle conduit facilities, which are believed to be sufficient to fund peak fleet needs. The corporate revolver does not mature until May 2016 and no other corporate debt is due until 2014.
Operating performance has improved significantly since 2009. Record earnings were reported for the second quarter of 2011 (2Q'11) and management expects another record quarter in 3Q'11. Outsized vehicle gains have boosted 2011 performance, but vehicle revenue grew 6.8% in the first half of 2011 (1H'11), year over year, ancillary fees were up 12.1%, and vehicle funding costs were down 12% with improved ABS and conduit funding costs.
ABG is the surviving legal entity from the split of Cendant Corporation into four companies in August 2006. The company is one of the largest general-use car rental operators in the world, composed of two very recognized brands; Avis and Budget. The average rental fleet was 338,101 vehicles at June 30, 2011 and the company generated approximately $3.9 billion of vehicle revenue in 2010. The company's stock trades on the NASDAQ under the ticker CAR.
Fitch has taken the following rating actions:
Avis Budget Group, Inc.
--Long-term IDR affirmed at 'B+'.
Avis Budget Car Rental, LLC
--Long-term IDR affirmed at 'B+'.
--Senior secured debt upgraded to 'BB+/RR1' from 'BB-/RR3'; and
--Senior unsecured debt upgraded to 'B+/RR4' from 'B-/RR6'.
The Rating Outlook is Positive.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
-- 'Global Financial Institutions Rating Criteria' (Aug. 16. 2011); and
-- 'Finance and Leasing Companies Criteria' (Dec. 13, 2010).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=649171
Finance and Leasing Companies Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=587245
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