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 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.
Capitalisation 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 rating actions.