Rating Action: Moody's assigns provisional ratings to Avis Budget Series 2020-2 rental car ABS
Global Credit Research - 31 Jul 2020
New York, July 31, 2020 -- Moody's Investors Service (Moody's) has assigned ratings of (P)Aa1 (sf) to the Series 2020-2 Class A fixed rate Rental Car Asset Backed Notes, (P)A3 (sf) to the Series 2020-2 Class B fixed rate Rental Car Asset Backed Notes, and (P)Baa3 (sf) to the Series 2020-2 Class C fixed rate Rental Car Asset Backed Notes, (together with the Class A Notes and the Class B Notes, the Series 2020-2 Notes) to be issued by Avis Budget Rental Car Funding (AESOP) LLC (the issuer). The Series 2020-2 Notes will have an expected final maturity of approximately 60 months. The issuer is an indirect subsidiary of the sponsor, Avis Budget Car Rental, LLC (ABCR, B2 negative). ABCR is a subsidiary of Avis Budget Group, Inc. ABCR is the owner and operator of Avis Rent A Car System, LLC (Avis), Budget Rent A Car System, Inc. (Budget), Zipcar, Inc and Payless Car Rental, Inc. (Payless).
The complete rating actions are as follows:
Issuer: Avis Budget Rental Car Funding (AESOP) LLC
Series 2020-2 Rental Car Asset Backed Notes, Class A, Assigned (P)Aa1 (sf)
Series 2020-2 Rental Car Asset Backed Notes, Class B, Assigned (P)A3 (sf)
Series 2020-2 Rental Car Asset Backed Notes, Class C, Assigned (P)Baa3 (sf)
RATINGS RATIONALE
The provisional ratings on the Series 2020-2 Notes are based on (1) the credit quality of the collateral in the form of rental fleet vehicles, which ABCR uses in its rental car business, (2) the credit quality of ABCR as the primary lessee and as guarantor under the operating lease, (3) the track-record and expertise of ABCR as sponsor and administrator, (4) the available credit enhancement, which consists of subordination and over-collateralization, (5) minimum liquidity in the form of cash and/or a letter of credit, and (6) the transaction's legal structure.
The ratings also reflect the difficult operating environment owing to the ongoing coronavirus pandemic. Moody's considered: (1) the challenging market conditions in the rental car market, including the severe drop in demand and ABCR's high lease payment obligation relative to fleet utilization, (2) uncertainty around the value of used vehicles owing to a resurgence of COVID-19, the volume of sales from all US rental car companies' in their efforts to de-fleet, among other factors, and (3) the continued decrease in program vehicles in the securitized fleet.
The total credit enhancement requirement for the Series 2020-2 Notes will be dynamic, and determined as the sum of (1) 12.75% for vehicles subject to a guaranteed depreciation or repurchase program from eligible manufacturers (program vehicles) rated at least Baa3 by Moody's, (2) 16.25% for all other program vehicles, and (3) 27.10% for non-program (risk) vehicles (up from 20.80% for the 2020-1 transaction which closed on 29 January), in each case, as a percentage of the outstanding note balance. Consequently, the actual required amount of credit enhancement will fluctuate based on the mix of vehicles in the securitized fleet. As in prior issuances, the transaction documents stipulate that the required total enhancement shall include a minimum portion which is liquid (in cash and/or a letter of credit), sized as a percentage of the outstanding note balance, rather than fleet vehicles. The Class A Notes will also benefit from subordination provided by the Class B and C Notes, which will represent approximately 16.5% of the outstanding balance of the Series 2020-2 Notes. The Class B Notes will benefit from subordination provided by the Class C Notes, which will represent approximately 8.1% of the outstanding balance of the Series 2020-2 Notes.
The rapid spread of the coronavirus outbreak, the government measures put in place to contain it and the deteriorating global economic outlook, have created a severe and extensive credit shock across sectors, regions and markets. Our analysis has considered the effect on the performance of corporate assets from the collapse in US economic activity in the second quarter and a gradual recovery in the second half of the year. However, that outcome depends on whether governments can reopen their economies while also safeguarding public health and avoiding a further surge in infections. As a result, the degree of uncertainty around our forecasts is unusually high. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
Below are the assumptions Moody's applied in the analysis of this transaction:
Risk of sponsor default: Moody's assumed a 60% decrease in the probability of default (from Moody's idealized default probability tables) implied by the B2 rating of the sponsor. This decrease reflects Moody's view that, in the event of a bankruptcy, ABCR would be more likely to reorganize under a Chapter 11 bankruptcy filing, as it would likely realize more value as an ongoing business concern than it would if it were to liquidate its assets under a Chapter 7 filing. Furthermore, given the sponsor's competitive position within the industry and the size of its securitized fleet relative to its overall fleet, the sponsor is likely to affirm its lease payment obligations in order to retain the use of the fleet and stay in business. Moody's arrives at the 60% decrease assuming an 80% probability Avis would reorganize under a Chapter 11 bankruptcy and a 75% probability (90% assumed previously) Avis would affirm its lease payment obligations in the event of Chapter 11.
Disposal value of the fleet: Moody's assumed the following haircuts to the net book value (NBV) of the vehicle fleet:
Non-Program Haircut upon Sponsor Default -- Mean: 19% - 25%
Non-Program Haircut upon Sponsor Default -- Standard Deviation: 6%
Fixed Program Haircut upon Sponsor Default: 10%
Additional Fixed Non-Program Haircut upon Manufacturer Default: 20%
Fleet composition -- Moody's assumed the following fleet composition (based on NBV of vehicle fleet):
Non-program Vehicles: 90%
Program Vehicles: 10%
Non-program Manufacturer Concentration (percentage, number of manufacturers, assumed rating):
Aa/A Profile: 20%, 2, A3 Baa Profile: 60%, 3, Baa3 Ba/B Profile: 20%, 1, B1 Program Manufacturer Concentration (percentage, number of manufacturers, assumed rating): Aa/A Profile: 0%, 0, A3 Baa Profile: 80%, 2, Baa3 Ba/B Profile: 20%, 1, B1
Manufacturer Receivables: 0%; receivables distributed in the same proportion as the program fleet (Program Manufacturer Concentration and Manufacturer Receivables together should add up to 100%)
Correlation: Moody's applied the following correlation assumptions:
Correlation among the sponsor and the vehicle manufacturers: 10%
Correlation among all vehicle manufacturers: 25%
Default risk horizon -- Moody's assumed the following default risk horizon:
Sponsor: 5 years Manufacturers: 1 year
A fixed set of time horizon assumptions, regardless of the remaining term of the transaction, is used when considering sponsor and manufacturer default probabilities and the expected loss of the related liabilities, which simplifies Moody's modeling approach using a standard set of benchmark horizons.
Detailed application of the assumptions are provided in the methodology.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was "Moody's Global Approach to Rating Rental Fleet Securitizations" published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1232483. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Factors that would lead to an upgrade or downgrade of the ratings:
Up
Moody's could upgrade the ratings of the Series 2020-2 Notes, as applicable if, among other things, (1) the likelihood of the transaction's sponsor defaulting on its lease payments were to decrease, (2) the likelihood of the sponsor accepting its lease payment obligation in its entirety in the event of a Chapter 11 were to increase, (3) assumptions of the credit quality of the pool of vehicles collateralizing the transaction were to strengthen, as reflected by a stronger mix of program and non-program vehicles and stronger credit quality of vehicle manufacturers, and (4) the residual values of the non-program vehicles collateralizing the transaction were to increase materially relative to Moody's expectations.
Down
Moody's could downgrade the ratings of the Series 2020-2 Notes if, among other things, (1) the likelihood of the transaction's sponsor defaulting on its lease payments were to increase, (2) the likelihood of the sponsor accepting its lease payment obligation in its entirety in the event of a Chapter 11 were to decrease, (3) assumptions of the credit quality of the pool of vehicles collateralizing the transaction were to weaken, as reflected by a weaker mix of program and non-program vehicles and weaker credit quality of vehicle manufacturers, and (4) the residual values of the non-program vehicles collateralizing the transaction were to decrease materially relative to Moody's expectations.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
In rating this transaction, Moody's used a cash flow model to model cash flow stress scenarios to determine the extent to which investors would receive timely payments of interest and principal in the stress scenarios, given the transaction structure and collateral composition.
Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Arti Mattu Asst Vice President - Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Karen Ramallo Senior Vice President/Manager Structured Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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