New York, October 28, 2010 -- Moody's Investors Service has assigned definitive ratings of Aaa(sf) to
the $170,500,000 Series 2010-4 Class A fixed
rate Rental Car Asset Backed Notes (Class A Notes) and Baa2(sf) to the
$25,500,000 Series 2010-4 Class B fixed rate
Rental Car Asset Backed Notes (Class B Notes and, together with
the Class A Notes and the Series 2010-4 Class C fixed rate Rental
Car Asset Backed Notes (the Class C Notes), the Series 2010-4
Notes).
Issuer: Avis Budget Rental Car Funding (AESOP) LLC, Series
2010-4
$170,500,000 Series 2010-4 2.09%
Class A Notes, Assigned Aaa(sf)
$25,500,000 Series 2010-4 4.02%
Class B Notes, Assigned Baa2(sf)
RATINGS RATIONALE
The Series 2010-4 Notes, which have a 42 month expected final
maturity, were issued by Avis Budget Rental Car Funding (AESOP)
LLC (the Issuer). The Issuer is an indirect subsidiary of the sponsor,
Avis Budget Car Rental, LLC (ABCR). ABCR, a subsidiary
of Avis Budget Group, Inc., is the owner and operator
of Avis Rent A Car System, LLC (Avis) and Budget Rent A Car System,
Inc. (Budget).
The Series 2010-4 Notes were sold in a privately negotiated transaction
without registration under the Securities Act of 1933 (the Act) under
circumstances reasonably designed to preclude a distribution thereof in
violation of the Act. The issuance was designed to permit resale
under Rule 144A.
As described in a separate press release, the Issuer also contemporaneously
issued its Series 2010-5 Notes with a 65 month expected final maturity.
As further described below, the definitive ratings for the Series
2010-4 Notes are based on (1) collateral in the form of rental
fleet vehicles, (2) the presence of ABCR as lessee under operating
leases, (3) minimum liquidity in the form of cash or letters of
credit, (4) the legal structure, (5) the capabilities and
the expertise of ABCR, (6) and in the case of the Class A Notes,
subordination provided by the Class B and Class C Notes, and (7)
in the case of the Class B Notes, subordination provided by the
Class C Notes.
The primary assets backing the Series 2010-4 Notes are an interest
in loans made from the Issuer to two bankruptcy remote, special
purpose wholly-owned subsidiaries of ABCR (the Lessors).
The above mentioned loans are secured by (1) a master operating lease
with ABCR under which ABCR makes monthly payments and (2) a first priority
perfected security interest in vehicles owned by the Lessors that comprise
the bulk of the Avis and Budget daily rental car fleets.
The Issuer's various note issuances (i.e., the Series
2010-4 Notes and the Issuer's other outstanding series) principally
fund loans to the Lessors who use the proceeds to purchase vehicles.
The Lessors lease these vehicles to ABCR, as lessee, under
operating leases. ABCR then subleases the vehicles to Avis and
Budget. ABCR, as lessee, is responsible for lease payments
covering, among other things, interest on the Issuer's
notes as well as depreciation on the vehicles.
The vehicles backing the Series 2010-4 Notes include both program
vehicles (acquired vehicles subject to repurchase, or guaranteed
a minimum depreciation or resale value, by the related auto manufacturer
at pre-set prices) and non-program vehicles (acquired vehicles
that do not benefit from such repurchase or guaranteed depreciation agreements).
The total enhancement requirement for the Series 2010-4 Notes is
dynamic and is determined as the sum of (1) 25.00% for vehicles
subject to a guaranteed depreciation or repurchase program from eligible
manufacturers (program vehicles) rated at least Baa2 (unlimited) or Baa3
(subject to a limit of 10% of the total securitized fleet by net
book value); (2) 28.00% for all other program vehicles;
and (3) 31.25% for non-program (risk) vehicles;
in each case, as a percentage of the outstanding note balance.
Consequently, the actual required amount of credit enhancement fluctuates
based on the mix of vehicles in the securitized fleet. As in prior
transactions the required total enhancement must include a minimum portion
which is liquid (in cash and/or letter of credit), sized at 2.00%
of the outstanding note balance, rather than fleet vehicles.
The Class A Notes also benefit from subordination provided by the Class
B and Class C Notes respectively representing 12.75% and
2.00% of the outstanding Series 2010-4 Note balance.
This subordination percentage behind the Class A Notes will increase once
principal amortization begins on the Class A Notes. The Class B
Notes benefit from subordination provided by the Class C Notes representing
2.00% of the outstanding Series 2010-4 Note balance.
This subordination percentage behind the Class B Notes will increase once
principal amortization begins on the Class B Notes.
The transaction allocates cash flows sequentially with no payments of
interest to holders of the subordinate Notes until all interest due on
the senior Notes is paid in full and no payments of principal to holders
of the subordinate Notes, until the senior Notes are paid in full.
In particular, all cash flows that represent payments of interest
on the loans by the Lessors or amounts earned on permitted investments
received on account of the respective Series of Notes are allocated as
follows: (1) first, to pay all interest due on the Class A
Notes (whether accrued, in arrears or capitalized as a result of
being in arrears), (2) second, to pay all interest due on
the Class B Notes (whether accrued, in arrears or capitalized as
a result of being in arrears), and then (3) third, to pay
all interest due on the Class C Notes (whether accrued, in arrears
or capitalized as a result of being in arrears).
All other cash flows received on account of the respective Series of Notes
are allocated as follows: (1) first, to pay all principal
due on the Class A Notes, (2) second, to pay all principal
due on the Class B Notes, and then (3) third, to pay all principal
due on the Class C Notes.
Unless a Series 2010-4 rapid amortization event occurs earlier,
the six month controlled amortization period for the Series 2010-4
Notes will commence on October 1, 2013 (month 36 after closing),
with an expected final maturity date of April 20, 2014 (month 42
after closing), and a legal final maturity date of April 20,
2015.
For each month during the controlled amortization period (other than the
first month thereof), mandatory equally sized principal payments
are required to be made to reduce the note balance to zero by the expected
final maturity date. If the Series 2010-4 Notes are not
fully paid by the expected final maturity date, all vehicle disposition
proceeds, monthly depreciation payments and other principal collections,
after the Issuer's expenses, received thereafter will be applied
to reduce Note principal until the Series 2010-4 Notes are fully
paid as described above.
In addition, under the transaction documentation, the indenture
trustee will automatically direct the Issuer to carry out a limited forced
liquidation of vehicles to generate enough disposition proceeds to pay-off
the bondholders at par if the bonds have not been fully paid by the expected
final and the Issuer's 30 day cure period has elapsed.
KEY FACTORS IN RATING ANALYSIS
The key factors in Moody's rating analysis include (1) the probability
of default by ABCR, as lessee, (2) the likelihood of a bankruptcy
or default by the auto manufacturers providing vehicles to the rental
car fleet owned by the Lessors, and (3) the recovery rate on the
rental car fleet in the event that ABCR defaults. Monte Carlo simulation
modeling was used to assess the impact on bondholders of these variables.
Moody's ratings analysis makes assumptions about key factors,
such as (1) the likelihood of default of ABCR (and the vehicle manufacturers
who provide program agreements), (2) the composition of the pool's
vehicle mix over time and (3) the realizable value of the portion of the
fleet backing the ABS should fleet liquidation be necessary. Data
is unavailable on vehicle values in a large scale stressed liquidation.
To address this variability, we make assumptions we believe to be
conservative about appropriate recovery value haircuts. Consequently,
the rating action was based on limited historical data.
V-SCORE AND LOSS SENSITIVITY
Moody's V Score. The V Score for this transaction is Medium,
which is the same as the V score assigned for the U.S. Rental
Car ABS sector. The V Score indicates "Medium" uncertainty about
critical assumptions.
Moody's V Scores provide a relative assessment of the quality of available
credit information and the potential variability around the various inputs
to a rating determination. The V Score ranks transactions by the
potential for significant rating changes owing to uncertainty around the
assumptions due to data quality, historical performance, the
level of disclosure, transaction complexity, the modeling
and the transaction governance that underlie the ratings. V Scores
apply to the entire transaction (rather than individual tranches).
Moody's Parameter Sensitivities. For this exercise, we analyzed
stress scenarios assessing the potential model-indicated output
impact if (a) the current B2 rating of ABCR was to immediately decline
to Caa1, Caa2 and Caa3 and (b) the assumed modeled haircuts to estimated
depreciated vehicle market values were increased by 5%, 10%
and 15%. Haircuts are expressed as a percentage of the estimated
depreciated market value of the vehicle collateral. We model potential
vehicle collateral liquidation value by estimating depreciated market
value and then applying haircuts and we use triangular distributions for
those haircuts (see methodology below). The stresses increase the
base case triangular distribution haircuts by the following percentage
points: 5%, 10% and 15%. For example,
if one of the triangular distribution haircuts in the base case is (5%,
15%, 30%), and this is increased by 5%
points, then the resulting stressed haircut would be a triangular
distribution of (10%, 20%, 35%).
Using such assumptions, the Aaa initial model-indicated output
for the Class A Notes might change as follows: (a) with ABCR rated
B2, the Aaa initial note output would remain at Aaa under both the
base recovery and 5% increase in market value haircut assumptions
but change to Aa1 and Aa3 with each lower recovery assumption; (b)
with ABCR rated Caa1, the Aaa initial note output would remain Aaa
under both the base recovery and 5% increase in market value haircut
assumptions but change to Aa2 and A1 with each lower recovery assumption;
(c) with ABCR rated Caa2, the Aaa initial note output would remain
Aaa under both the base recovery and 5% increase in market value
haircut assumptions but change to Aa2 and A1 with each lower recovery
assumption; and (d) with ABCR rated Caa3, the Aaa initial note
output would remain Aaa under both the base recovery and 5% increase
in market value haircut assumptions but change to Aa2 and A1 with each
lower recovery assumption.
Also using the above assumptions, the Baa2 initial model-indicated
output for the Class B Notes might change as follows: (a) with ABCR
rated B2, the Baa2 initial note output would remain at Baa2 using
the base recovery assumption but change to Ba1, B2 and below B3
with each lower recovery assumption; (b) with ABCR rated Caa1,
the Baa2 initial note output would remain Baa2 using the base recovery
assumption but change to Ba2, below B3 and below B3 with each lower
recovery assumption; (c) with ABCR rated Caa2, the Baa2 initial
note output would remain Baa2 using the base recovery assumption but change
to Ba3, below B3 and below B3 with each lower recovery assumption;
and (d) with ABCR rated Caa3, the Baa2 initial note output would
remain Baa2 using the base recovery assumption but change to B1,
below B3 and below B3 with each lower recovery assumption.
Parameter Sensitivities are not intended to measure how the rating of
the security might migrate over time, rather they are designed to
provide a quantitative calculation of how the initial rating might change
if key input parameters used in the initial rating process differed.
The analysis assumes that the deal has not aged. Parameter Sensitivities
only reflect the ratings impact of each scenario from a quantitative/model-indicated
standpoint. Qualitative factors are also taken into consideration
in the ratings process, so the actual ratings that would be assigned
in each case could vary from the information presented in the Parameter
Sensitivity analysis.
PRINCIPAL RATING METHODOLOGY
The principal methodology used in rating the notes is described below.
Other methodologies and factors that may have been considered in the process
of rating this issue can also be found in the Research & Ratings directory,
in the Rating Methodologies sub-directory on www.moodys.com.
The default probability of ABCR is simulated based on its probability
of default rating and Moody's idealized default rates. In
addition, we stress the rating of ABCR to provide a limited degree
of de-linkage of the rated ABS from ABCR's rating.
Under the terms of the simulation, in cases where ABCR does not
default it is assumed that bondholders are repaid in full and no liquidation
of the Issuer's rental truck fleet backing the ABS is necessary.
The default probability of ABCR was simulated based on its current probability
of default rating and Moody's idealized default rates. We
stress the rating of ABCR as lessee to provide a limited degree of de-linkage
of the rated ABS from the corporate rating of the sponsor.
In addition, for the senior Class A Notes, we stressed the
rating of ABCR close to default to provide a degree of ratings stability
appropriate to the Class A Notes' initial rating of Aaa(sf).
For the subordinate Class B Notes, we applied a greater stress to
the sponsor's rating than we would apply for a comparatively rated
senior class. This additional stress decreases the sensitivity
of such subordinate securities to default and loss given default created
by their junior position and relative thinness or small size (which is
typical for subordinate tranches), as compared to the senior Class
A Notes.
Like all rental car companies, ABCR's fleet (the majority
of which is owned by the Lessors) includes both program and non-program
vehicles (also known as 'risk' vehicles). Under the
terms of the simulation, in cases where ABCR does not default it
is assumed that bondholders are repaid in full and no liquidation of the
Lessors' rental car fleet backing the ABS is necessary.
In cases where ABCR does default, we always assume that the portion
of the Lessors' fleet backing the ABS must be liquidated in order
to repay their secured loans to the Issuer, and ultimately the bondholders.
In those cases, the default probability of the related manufacturers
must also be simulated. Due to Chrysler's, Ford's
and GM's high concentrations in the pool and non-investment
grade ratings or non-ratings, as applicable, their
defaults were simulated based on estimates for probability of default
provided by Moody's corporate analysts. These default estimates
differentiate between default with continued operation and default with
cessation of operations. The default probability of the other manufacturers
is derived from their respective ratings.
In simulating liquidation of the rental car fleet following an ABCR default,
it is assumed that the portion of the program vehicle fleet associated
with non-defaulting manufacturers (both non-bankrupt manufacturers
and bankrupt Chapter 11 manufacturers honoring their program obligations)
is returned to the related manufacturer at full book value. For
the non-program (risk) vehicle fleet, as well as the portion
of the program vehicle fleet associated with defaulting manufacturers
not honoring obligations on their program vehicles, it is assumed
the vehicles will be sold in the open market.
For vehicles sold in the open market, the market value of a vehicle
at the time of liquidation, before any haircuts are applied,
is estimated using market depreciation data from the National Automobile
Dealers Association (NADA) for each manufacturer with vehicles in the
collateral pool. In making this calculation we generally assume
a purchase price for program and non-program (risk) vehicles which
is 10% below MSRP, to give credit to the volume discounts
typically achieved by rental car companies. However, in the
case of Avis Budget, we assume the discount for non-program
(risk) vehicles is 15% to reflect both the terms required under
the transaction documentation and historic performance.
In addition, we assume a delay in sale of six months and therefore
net an additional six months of depreciation. This six month delay
in fleet liquidation following a default by ABCR, as lessee,
contemplates potential legal challenges to obtaining control of the fleet
and the potential difficulties of marshaling and selling such a large
number of vehicles. The base liquidation value of sold vehicles
is determined by applying a base haircut to this estimated depreciated
market value. The base haircut is simulated using a triangular
distribution (i.e., minimum, mode, maximum)
with values of (5%, 15%, 30%).
The resulting calculation provides the base liquidation value.
Additional haircuts may be applied to the base liquidation value depending
on the manufacturer's simulated status: non-bankrupt,
bankrupt Chapter 11 or bankrupt Chapter 7. No further haircuts
are applied to either (i) non-program (risk) and program vehicles
from non-bankrupt manufacturers or (ii) program vehicles from bankrupt
Chapter 11 manufacturers who are assumed to honor their program obligations.
However, in all other cases, the base liquidation value is
further reduced. For bankrupt Chapter 11 manufacturers, we
reduce the base liquidation of their non-program (risk) vehicles
and their program vehicles whose obligations are assumed not to be honored
by multiplying the base liquidation value by a haircut, which is
simulated using a triangular distribution with input parameters (14%,
18%, 19%). For manufacturers assumed to be
in Chapter 7, we reduce base liquidation value of their vehicles
by multiplying the base liquidation value by a haircut, which is
simulated using a triangular distribution with input parameters (25%,
35%, 50%).
Moody's Investors Service did not receive or take into account a
third party due diligence report on the underlying assets or financial
instruments related to the monitoring of this transaction in the past
six months.
ADDITIONAL RESEARCH
A pre-sale report for this transaction and the special reports,
"Updated Report on V Scores and Parameter Sensitivities for Structured
Finance Securities" and "V Scores and Parameter Sensitivities in the U.S.
Vehicle ABS Sector" are available on moodys.com. Additional
research, including reports for prior transactions, is available
at www.moodys.com.
In addition, Moody's publishes a weekly summary of structured finance
credit, ratings and methodologies, available to all registered
users of our website, at www.moodys.com/SFQuickCheck.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information and confidential
and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
MOODY'S adopts all necessary measures so that the information it uses
in assigning a credit 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 ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service 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 the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
New York
Sally Acevedo
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Everett Rutan
Senior Vice President
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
Moody's assigns definitive ratings to Avis Budget senior-subordinate rental car ABS, Series 2010-4
