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.
RATING ACTION RATIONALE
The upgrades to the IDR are supported by the strength of ABG’s dual brand strategy, its leading position within the on-airport rental market and record operating leads to 2012. ABG’s liquidity profile is powerful given increased EBITDA and operating cash generation, in addition to improved access to the capital markets. Fitch believes ABG currently has a more flexible business model than before the last downturn via its improvements in revenue and supplier diversity, operating leverage, liquidity and funding. As a result upgrade, Fitch not deems it essential to assign specific Recovery Ratings to the senior secured and unsecured debt, because 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 liable to pricing pressures and passenger volumes in air travel, Fitch believes the corporate is best equipped to control cyclical downturns and maintain positive earnings, barring extreme disruptions in vehicle prices and suppliers, which might raise fleet costs beyond levels that can’t be passed directly 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
Operating Performance
ABG achieved record operating performance in 2012 as net income grew 25% to $7.4 billion due to the substantial growth within the international segment because of the Avis Europe acquisition in 2011. Adjusted EBITDA for the entire year 2012 improved 33% to $802 million when compared with $605 million in 2011 on higher revenues and lower fleet costs. Fitch expects operating performance will continue to enhance as ABG further benefits from improved operating leverage caused by integration of Avis Europe in addition to 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 in line with 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 powerful given increased EBITDA, operating cash generation, and improved capital markets access. At year-end 2012, the corporate had $606 million of unrestricted cash, and nearly $3.4 billion of availability under its various financing arrangements. In the course of 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 professional 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 a rise of unsecured debt in ABG’s funding mix positively, because it would add additional flexibility to the company’s overall funding profile.
Capitalisation and Leverage
As a function of money flow leverage, total debt to EBITDA improved to a few.77x in 2012 in comparison to 3.83x in 2011. Excluding vehicle debt and related interest expense in addition to noncash vehicle depreciation, corporate debt to adjusted EBITDA declined to three.62x in 2012 in comparison to 5.30x one-year prior. The advance in corporate leverage was driven by a mix of incremental earnings and lower corporate debt balances through deleveraging. Balance sheet leverage, as measured by total debt to equity, improved significantly to twelve.83x at year-end 2012 from 21.28x in 2011 because of increased retained earnings through the period.
Given the extra $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 four.84x on a company debt to adjusted EBITDA basis. This incorporates Fitch’s expectation for ABG’s pro forma adjusted EBITDA projected for 2013, assuming no advantage of expected $60 million of midpoint synergies. ABG manages its leverage from a company leverage standpoint, net of balance sheet cash. Pro forma consolidated leverage, net of money, would range between 3.37x and three.82x, which remains in step with the company’s articulated target of between 3x and 4x. Fitch believes the incremental leverage ABG undertook to obtain 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 due to the unconditional guarantee provided by ABG and its various subsidiaries. Therefore, the ratings are sensitive to the identical factors that will drive a transformation in ABG’s IDR.
RATING SENSITIVITIES – IDRS, SENIOR DEBT
Fitch believes that positive ratings momentum is restricted within the near term, although over the long run, ratings might 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 gain operating synergies from its recent ZIP acquisition and successfully leverage the logo into stronger earnings performance over the years would even be viewed positively by Fitch.
Conversely, negative rating actions will be driven by material deterioration in revenue and cash flow generation due to a decline in passenger volumes, rental rates and used car values, which might impair ABG’s access to funding, liquidity, and/or capitalization. Leverage remaining at materially higher levels, reduced commitment by management to lessen leverage, or an inability to generate incremental revenues from ZIP may also yield negative rating actions.
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