Hertz’s Dollar Buyout Delays High-Grade Goals: Corporate Finance
Hertz Global Holdings Inc. (HTZ)’s $2.6 billion purchase of Dollar Thrifty Automotive Group Inc. (DTG) will increase total debt by as much as 28 percent and delay the junk- rated company’s long-sought ascent to investment grade.
Hertz obtained $1.95 billion in financing to support its buyout and will assume $1.6 billion in Dollar Thrifty’s obligations. Park Ridge, New Jersey-based Hertz’s credit-default swaps, which rise as confidence in a borrower’s creditworthiness diminishes, increased 6.6 basis points yesterday, according to data provider CMA, which is owned by McGraw-Hill Cos.
Hertz Chief Executive Officer Mark Frissora said on an Aug. 27 conference call that achieving an investment-grade rating was still the company’s “ultimate goal,” even as the acquisition boosts its debt to 4 times earnings before interest, taxes, depreciation and amortization. Standard & Poor’s placed its B+ rating on the second-most leveraged U.S. auto-rental company on watch for a possible reduction, citing the increase in debt.
“The acquisition is a positive for the business profile, but they’re adding a lot of debt and we need to see what it does to the financial profile,” Betsy Snyder, an analyst at S&P, said yesterday in a telephone interview.
Credit-default swaps tied to the debt of Hertz, which has been trying to acquire Tulsa, Oklahoma-based Dollar Thrifty for almost five years, rose to 549.4 basis points yesterday, CMA data show. That means investors pay $549,400 annually on a contract protecting $10 million of debt for five years.
Moody’s Investors Service gives the car-rental company a B1 corporate rating, four levels below investment grade and equivalent to the S&P designation. The weighted average fixed coupon on Hertz’s debt is 7.04 percent, according to data compiled by Bloomberg.
The average yield on the bonds of high-risk U.S. companies, with ratings below Baa3 by Moody’s and under BBB- by S&P, was 7.31 percent yesterday compared with 3.03 percent for investment-grade firms, according to Bank of America Merrill Lynch data.
“A downgrade, if any, would be limited to one notch,” S&P’s Snyder wrote in a report yesterday, adding that this was Hertz’s third and most expensive attempt to buy Dollar Thrifty.
Hertz’s total debt to gross Ebitda will increase to 4 times after the acquisition from 3.6 times as of June 30, according to an Aug. 27 investor presentation. That puts the company’s leverage second only among its peers to the 4.6 times of Avis Budget Group Inc. (CAR), Bloomberg data show.
The auto-rental company reported a 7.4 percent increase in revenue during the second quarter ended June 30, to $2.23 billion from $2.07 billion in the comparable year-ago period, it said in an Aug. 1 regulatory filing. Net income was $92.9 million, compared with $60.1 million a year earlier and total debt was $12.5 billion.
Hertz began its pursuit of Dollar Thrifty in April 2007 and made a formal bid in 2010 of about $1.2 billion that its shareholders rejected. Hertz made another offer last year that it later withdrew, citing market conditions.
The company will see $160 million in cost savings and sales growth from the acquisition, Frissora said on yesterday’s call.
Barclays Plc, Bank of America Corp. and Deutsche Bank AG are providing a $1.95 billion bridge financing, according to a commitment letter filed with the U.S. Securities and Exchange Commission yesterday.
The loan will pay interest initially at 5.375 percentage points more than the London interbank offered rate with a 1 percent minimum on the lending benchmark, according to the filing. If the financing is not repaid in the first three months following the closing date, the margin will increase 0.5 percentage point every three months.
Bridge facilities are short-term loans that usually mature in one year and are often used as backstops to bond offerings or longer-dated bank debt.
Hertz may sell about $1.45 billion in bonds and add as much as $500 million to an existing loan, according to a person with knowledge of the matter who asked not to be identified because the details are private. “The final split would be dependent on market conditions when it’s time to execute,” Richard Broome, a spokesman for Hertz, said in an e-mailed statement.
A $1.5 billion bond offering from a company with the name recognition of Hertz would be well received, Margie Patel, a money manager at Wells Fargo & Co. who oversees about $1 billion, said in a telephone interview.
“Larger names are particularly doing well,” she said about the current fixed-income market. “There’s an insatiable demand for paper.”
The company’s $1 billion of 6.75 percent notes due in April 2019 were quoted at 105.5 cents on the dollar at 10:05 a.m. in New York to yield 5.74 percent, according to Trace, the bond- price reporting system of the Financial Industry Regulatory Authority. That’s down from 106.5 cents on Aug. 7, which was the highest ever for that bond, Trace data show.
The average yield on B rated debt was 7.21 percent, according to Bank of America Merrill Lynch index data.
Hertz’s $1.38 billion term loan due in March 2018 pays interest at 2.75 percentage points more than Libor with a 1 percent minimum, Bloomberg data show. The debt was quoted at 99.4 cents on the dollar today, according to Bloomberg prices.
KDP Investment Advisors Inc. lowered its default-risk ranking on Hertz to the equivalent of a B2 rating from Moody’s and B from S&P, according to a report yesterday. Analyst Kip Penniman cited higher overall leverage, incremental first-lien debt outstanding, additional junk-bond issuance and lower cash balances as reasons for the change.
“Hertz is focused on achieving credit ratios consistent with an investment-grade rating,” Evan Mann, an analyst at debt research firm GimmeCredit LLC wrote in a July 31 report. An “acquisition of Dollar Thrifty could cause the company to revisit or delay its investment-grade aspirations.”
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