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Rating Action:

Moody's affirms B1 rating of Hertz, outlook negative, and B3 rating of Dollar Thrifty, outlook positive

28 Apr 2010

Approximately $3 billion of Debt Affected

New York, April 28, 2010 -- Moody's Investors affirmed the ratings of the Hertz Corporation and Dollar Thrifty Automotive Group following the announcement of an agreement under which Hertz will acquire Dollar Thrifty for approximately $1.3 billion. Hertz's Corporate Family Rating and Probability of Default Rating are B1, its Speculative Grade Liquidity rating is SGL-3, and its outlook remains Negative. Dollar Thrifty's Corporate Family Rating and Probability of Default Rating are B3, its Speculative Grade Liquidity rating is SGL-3, and its rating outlook was revised to Positive from Stable as a result of the proposed transaction.

Under the terms of the proposed agreement the $1.3 billion purchase price will be funded with: a $750 million cash payment by Hertz; an approximately $350 million equity issuance by Hertz; and, a $200 million cash dividend to be paid by Dollar Thrifty to its shareholders prior to closing. Subsequent to Dollar Thrifty shareholder approval and satisfactory regulatory review, the transaction is expected to close during the fourth quarter of 2010.

The acquisition of Dollar Thrifty should result in meaningful long-term strategic benefits for the combined entity. The value-oriented, leisure-travel franchise of Dollar Thrifty will fill a gap in Hertz's existing service offerings, and Hertz anticipates that a minimum of $180 million in cost synergies will be achieved within 18 months of closing. Hertz also expects that its share of the total US car rental market will rise from 16% to 23%; this compares with public estimates of a 53% share for Enterprise Holdings and 20% for Avis Budget Group.

The transaction is taking place as car rental industry fundamentals are improving. Fleet levels are being maintained at conservative levels, moderate price increases are occurring in the leisure sector, and used car prices have rebounded sharply. In addition, the major competitors in the sector are focusing on improving returns through reducing costs and raising ancillary revenues. There appears to be less focus on attempts to gain share through price reductions. Consequently, the overall pricing environment may be more favorable. Finally, the availability of securitization funding for the sector has significantly improved.

Notwithstanding the potential long-term benefits of this transaction, Hertz continues to face a number of near-term challenges that underpin the negative rating outlook. Despite the company's successful cost reduction efforts and improving market fundamentals, its interest expense will rise by approximately $100 million during 2010 due to: increased borrowing costs associated with refinancings that were accomplished since 2009; the anticipated refinancing of international fleet debt; and, a higher level of revenue earning equipment. In addition, the company must still refinance approximately $1.7 billion in securitized debt that supports its international operations. Finally, should the Dollar Thrifty transaction be completed, Hertz may have to take on as much as $500 million of debt to preserve the liquidity used to fund its cash portion of the purchase price. Consequently, measures of EBITA/interest, which approximated only 1x during 2009, could show little improvement during 2010.

Hertz has stated that it has the capacity to fund its $750 million cash payment out of its current liquidity resources that include $801 million in unrestricted cash and $854 million available under its revolving credit facility. Moody's notes, however, that utilizing these sources to fund the purchase would materially weaken the company's liquidity profile, which the rating agency currently views as adequate as indicated by the SGL-3 Speculative Grade Liquidity rating. In order to preserve adequate liquidity, it will be critical for Hertz to obtain an alternate source of funding to support the cash portion of the purchase. As the date of the transaction's prospective closing approaches, the absence of an alternative source of funding could increase the likelihood that Hertz will fund the payment by utilizing cash on hand or by drawing on the credit facility. As this risk increases, there could be downward pressure on Hertz's Speculative Grade Liquidity and long-term ratings.

Hertz could consider a variety of funding alternatives to address its international fleet financing requirements and the cash payment for the Dollar Thrifty acquisition. These alternatives could include various combinations of asset-backed securitizations, secured bank debt, and secured or unsecured bonds. The nature of the financing alternatives Hertz chooses to utilize to meet its financing requirements could have an impact on the priority of claim of existing creditors and consequently on Moody's rating of specific instruments.

Should Hertz complete its European financing, and should favorable industry fundamentals be sustained during 2010, Hertz's prospects for strengthening its credit metrics (particularly interest coverage) would improve, and the rating outlook could be stabilized later in the year. An ability to sustain EBITA/interest above 1.2 times and maintain adequate liquidity would be supportive of a change in the outlook to stable.

Dollar Thrifty benefits from the same positive industry fundamentals as Hertz. However, the potential purchase by Hertz would address the major long-term risk factor facing the company. Dollar Thrifty is a small player relative to Hertz, Enterprise and Avis. Moreover, it is concentrated in a narrow spectrum of the car rental sector -- value-oriented leisure travel. To the extent that Dollar Thrifty is combined with Hertz, this risk would be mitigated. Consequently, the rating outlook for Dollar Thrifty is positive. The company's strong cash position of approximately $500 million should provide it with adequate liquidity to fund the proposed $200 million dividend.

The last rating action on Hertz was a downgrade of the company's CFR to B1 and change in its outlook to negative on July 14, 2009.

The last rating action on Dollar Thrifty was an upgrade of the company's CFR to B3 and change in the outlook to stable on November 20, 2009.

The principal methodology used in rating Hertz and of Dollar Thrifty was Moody's Global Equipment and Automobile Rental, published in August 2007 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's web site.

Hertz Corporation, headquartered in Park Ridge, NJ, is a leading automobile and equipment rental company.

Dollar Thrifty Automotive Group, headquartered in Tulsa, Oklahoma, is a large automobile rental company.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms B1 rating of Hertz, outlook negative, and B3 rating of Dollar Thrifty, outlook positive
No Related Data.
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