$1.2 billion of notes rated
New York, October 01, 2012 -- Moody's Investors Service assigned a B2 rating to the $1.2
billion of notes offered by HDTFS, Inc. The proceeds of the
notes, along with drawings under a $750 million term loan
and approximately $650 million in cash on hand, will be used
to fund The Hertz Corporation's (Hertz) $2.6 billion
acquisition of Dollar Thrifty Automotive Group, Inc. Until
the closing of the acquisition, the proceeds will be held in escrow
and be pledged as security for the notes. Upon closing the notes
will be assumed by Hertz and will rank pari passu with the company's
existing senior unsecured debt that is also rated B2.
RATINGS RATIONALE
The B2 rating of the notes reflects the priority of claim that the obligations
will have as senior unsecured debt within Hertz' capital structure,
as well as the company's B1 Corporate Family Rating (CFR) and Probability
of Default Rating (PDR). The B1 CFR and PDR reflect our expectation
that the strategic benefits from the acquisition of Dollar Thrifty Automotive
Group (Dollar) will enable the company to maintain a sound competitive
position in the North American car rental industry. In addition,
Hertz's credit metrics should remain near current levels despite
the addition of approximately $1.9 billion of acquisition-related
debt.
The acquisition will provide Hertz with a well-established and
highly competitive position in the value segment of the US car rental
market -- a segment in which Hertz's current position lags
that of its rivals. Moreover, the company has identified
a minimum of $160 million of cost synergies that it expects to
achieve over the next 24 months. Beyond these savings, Hertz
also anticipates that there will be additional growth opportunities resulting
from the acquisition. The B1 CFR anticipates that Hertz will achieve
a large portion of the planned synergies.
Notwithstanding these planned synergies, the $1.9
billion of additional debt taken on by Hertz should not result in a material
erosion of its current credit metrics. This capacity to retain
metrics near current levels despite the added debt is due largely to the
modest leverage and competitive return measures of Dollar. The
key credit metrics for Hertz vs. Dollar for the last-twelve-months
(LTM) through June 2012 include: pre-tax income/sales of
6.1% vs. 19.8%; EBIT/interest
of 1.7x vs. 3.5x; and debt/EBITDA of 3.8x
vs. 2.8x. (All metrics reflect Moody's standard adjustments).
Dollar's stand alone credit metrics are considerably stronger than those
of Hertz. As a result, when the entities are combined on
a pro forma basis with the addition of $1.9 billion of acquisition
debt, the resulting metrics do not reflect any material weakening
from Hertz's current stand alone metrics.
Pro forma for the additional debt and assuming no synergy benefits,
these LTM measures approximate the following: pre-tax income/sales
of 6.8%; EBIT/interest of 1.7x; and debt/EBITDA
of 4.0x. These pro forma measures support the B1 CFR.
Moreover, as Hertz achieves the planned synergies it will demonstrate
the strategic soundness of the transaction and will further strengthen
its credit profile.
A key factor supporting the rating is our expectation that Hertz will
maintain a sound liquidity profile. This is a critical consideration
given the sizable ongoing refunding requirements the company will face
in supporting its rental fleet. Pro forma for the acquisition,
Hertz's key liquidity source will include a $1.8 billion
ABL facility that matures in 2016, approximately $600 million
in unrestricted cash, and the proceeds from the sale of vehicles
and equipment. The key use of cash will include vehicle and equipment
purchases. Funding these purchases will require Hertz to renew
various maturing asset-backed-security (ABS) facilities
on an ongoing basis. We believe that the company's existing sources
of liquidity, its solid operating performance, the appetite
of the ABS market for securities supported by car rental assets,
and Hertz's pro-active strategy of planning facility renewals well
in advance of maturity will help preserve an adequate liquidity profile.
Healthy industry fundamentals are also a consideration in the rating.
We expect that the car rental sector will benefit from a number of factors.
Vehicle residual values should be supported by the disciplined approach
that automotive OEMs have adopted in better matching production levels
with retail demand. These values should also be supported by the
historically modest levels of off-lease vehicles likely to enter
the market over the intermediate term. Although pricing in the
car rental sector will remain competitive, the environment should
benefit from the consolidation that has taken place and by the increasing
focus of car rental companies on improving returns by reducing costs rather
than by growing share position through discounting. Finally,
demand in the equipment rental sector has improved significantly relative
to the levels experienced during 2009. Although there may be some
softening during 2013, demand should remain well above that of 2009.
Hertz's rating outlook could be changed to positive if the company were
to demonstrate clear progress in integrating Dollar and achieving the
planned synergies. Credit measures that might support a change
in outlook include pre-tax income/sales remaining above 7%
and EBIT/interest exceeding 2x. Any improvement in Hertz's outlook
or rating would also be dependent upon the company maintaining a prudent
liquidity profile.
There would be pressure on Hertz's rating if the company can not demonstrate
synergistic benefits of the acquisition. Metrics that might indicate
rating pressure include pre-tax income/sales below 5% and
EBIT/interest below 1.5x.
The principal methodology used in rating Hertz was the Global Equipment
and Automobile Rental Industry Methodology published in December 2010.
Other methodologies used include Loss Given Default for Speculative-Grade
Non-Financial Companies in the U.S., Canada
and EMEA published in June 2009. Please see the Credit Policy page
on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, 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 has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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 relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant 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.
Information sources used to prepare the rating are the following :
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Analytics information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not
an auditor and cannot in every instance independently verify or validate
information received in the rating process.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
for (B) further information regarding certain affiliations that may exist
between directors of MCO and rated entities as well as (C) the names of
entities that hold ratings from MIS that have also publicly reported to
the SEC an ownership interest in MCO of more than 5%. A
member of the board of directors of this rated entity may also be a member
of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's provides a date that
it believes is the most reliable and accurate based on the information
that is available to it. Please see the ratings disclosure page
on our website www.moodys.com for further information.
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.
Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's assigns B2 rating to Hertz acquisition notes; outlook is stable
