Fitch Upgrades Avis' Ratings Following Peer Review; Outlook Stable
CHICAGO -- April 24, 2013
Fitch Ratings has upgraded the Issuer Default Rating (IDR), senior secured,
and senior unsecured ratings of Avis Budget Group, Inc. (ABG) and its various
Fitch-rated subsidiaries following the completion of its auto rental and fleet
leasing peer review. The Rating Outlook is Stable. A full list of rating
actions is at the end of this release.
RATING ACTION RATIONALE
The upgrades to the IDR are supported by the strength of ABG's dual brand
strategy, its leading position in the on-airport rental market and record
operating results in 2012. ABG's liquidity profile is strong given increased
EBITDA and operating cash generation, as well as improved access to the
capital markets. Fitch believes ABG currently has a more flexible business
model than before the last downturn due to its improvements in revenue and
supplier diversity, operating leverage, liquidity and funding. As a result of
the upgrade, Fitch no longer deems it necessary to assign specific Recovery
Ratings to the senior secured and unsecured debt, as the relative notching of
the ratings to the IDR is reflective of its potential default risk for these
classes of debt.
Rating constraints include cyclicality of the business and its susceptibility
to potential slowdowns in travel volumes, and reliance on predominantly
secured funding. While ABG remains susceptible to pricing pressures and
passenger volumes in air travel, Fitch believes the company is better equipped
to manage cyclical downturns and maintain positive earnings, barring extreme
disruptions in vehicle prices and suppliers, which would raise fleet costs
beyond levels that cannot be passed on to renters.
The Stable Outlook reflects Fitch's expectation for continued access to the
capital markets through various market cycles, strong liquidity, consistent
operating cash flow generation, and continued earnings growth in 2013
supported by incremental EBITDA generation and improved operating leverage.
KEY RATING DRIVERS
ABG achieved record operating performance in 2012 as net income grew 25% to
$7.4 billion due to substantial growth in the international segment resulting
from the Avis Europe acquisition in 2011. Adjusted EBITDA for the full year
2012 improved 33% to $802 million compared to $605 million in 2011 on higher
revenues and lower fleet costs. Fitch expects operating performance will
continue to improve as ABG further benefits from improved operating leverage
resulting from integration of Avis Europe as well as its recent acquisition of
Zipcar, Inc. (ZIP) in March 2013 for $500 million. ABG expects pro forma
adjusted EBITDA to be $917 million, assuming $60 million of synergies, $17
million of adjusted EBITDA from ZIP, and last 12-month ABG adjusted EBITDA of
$840 million. Excluding expected synergies, Fitch expects pro forma
consolidated adjusted EBITDA to range between $742 million and $842 million
based on the company's guidance for standalone adjusted EBITDA for 2013. Given
strong residual values, cost reduction efforts, improved supplier diversity
and expansion of ancillary revenue products, Fitch believes ABG's earnings
forecasts are achievable.
Liquidity and Funding
Fitch believes ABG's liquidity profile is strong given increased EBITDA,
operating cash generation, and improved capital markets access. At year-end
2012, the company had $606 million of unrestricted cash, and nearly $3.4
billion of availability under its various financing arrangements. During the
first quarter of 2013, ABG raised approximately $685 million of corporate debt
in aggregate and increased its European securitization by approximately $195
million to fund the ZIP acquisition, refinance existing debt at more
attractive terms, and to fund peak seasonal vehicle purchases.
The company's funding profile is predominantly secured and ABG remains
primarily reliant on secured corporate debt and securitizations. On a pro
forma basis as of Dec. 31, 2012, vehicle-backed debt of $7.0 billion and
secured corporate debt of $949 million together represent approximately 75% of
total long-term debt. Fitch would view an increase of unsecured debt in ABG's
funding mix positively, as it would add additional flexibility to the
company's overall funding profile.
Capitalization and Leverage
As a function of cash flow leverage, total debt to EBITDA improved to 3.77x in
2012 compared to 3.83x in 2011. Excluding vehicle debt and related interest
expense as well as noncash vehicle depreciation, corporate debt to adjusted
EBITDA declined to 3.62x in 2012 compared to 5.30x one-year prior. The
improvement in corporate leverage was driven by a combination of incremental
earnings and lower corporate debt balances through deleveraging. Balance sheet
leverage, as measured by total debt to equity, improved significantly to
12.83x at year-end 2012 from 21.28x in 2011 due to increased retained earnings
during the period.
Given the additional $685 million of corporate debt raises to fund the ZIP
acquisition and refinance existing debt, pro forma consolidated leverage would
range between 4.26x and 4.84x on a corporate debt to adjusted EBITDA basis.
This incorporates Fitch's expectation for ABG's pro forma adjusted EBITDA
projected for 2013, assuming no benefit of expected $60 million of midpoint
synergies. ABG manages its leverage from a corporate leverage standpoint, net
of balance sheet cash. Pro forma consolidated leverage, net of cash, would
range between 3.37x and 3.82x, which remains consistent with the company's
articulated target of between 3x and 4x. Fitch believes the incremental
leverage ABG undertook to acquire ZIP was reasonable and is neutral to the
company's overall credit profile.
SUBSIDIARY AND AFFILIATED COMPANY RATING DRIVERS AND SENSITIVITIES
Avis Budget Finance PLC and Avis Budget Car Rental LLC are wholly-owned
subsidiaries of ABG. The ratings are aligned with that of ABG because of the
unconditional guarantee provided by ABG and its various subsidiaries.
Therefore, the ratings are sensitive to the same factors that might drive a
change in ABG's IDR.
RATING SENSITIVITIES - IDRS, SENIOR DEBT
Fitch believes that positive ratings momentum is limited in the near term,
although over the longer term, ratings may be positively influenced by
sustained improvements in leverage and liquidity, maintaining appropriate
capitalization, and economic access to the capital markets. Additionally,
ABG's ability to realize operating synergies from its recent ZIP acquisition
and successfully leverage the brand into stronger earnings performance over
time would also be viewed positively by Fitch.
Conversely, negative rating actions would be driven by material deterioration
in revenue and cash flow generation resulting from a decline in passenger
volumes, rental rates and used car values, which would impair ABG's access to
funding, liquidity, and/or capitalization. Leverage remaining at materially
higher levels, reduced commitment by management to reduce leverage, or an
inability to generate incremental revenues from ZIP could also yield negative
Fitch has upgraded the following ratings:
Avis Budget Group, Inc.
--Long-term IDR to 'BB-' from 'B+'.
Avis Budget Car Rental, LLC
--Long-term IDR to 'BB-' from 'B+';
--Senior secured debt to 'BBB-' from 'BB+/RR1';
--Senior unsecured debt to 'BB-' from 'B+/RR4'.
Avis Budget Finance PLC
--Long-term IDR to 'BB-' from 'B+';
--Senior unsecured debt to 'BB-' from 'B+/RR4'.
The Rating Outlook is revised to Stable from Positive.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
--'Finance and Leasing Companies Criteria' (Dec. 11, 2012);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012).
Applicable Criteria and Related Research
Rating FI Subsidiaries and Holding Companies
Finance and Leasing Companies Criteria
Global Financial Institutions Rating Criteria
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Johann Juan, +1-312-368-3339
Fitch Ratings, Inc.
70 West Madison Street
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Mohak Rao, CFA, +1-212-908-0559
Nathan Flanders, +1-212-908-0827
Brian Bertsch, +1-212-908-0549
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