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Rating Action:

Moody's assigns provisional rating of (P)Aaa and (P)Baa2 to Hertz-sponsored rental car ABS

15 Jul 2010

$576.8 million of asset-backed securities rated.

New York, July 15, 2010 -- Moody's has assigned the provisional ratings of (P)Aaa to the Class A-1, Class A-2 and Class A-3 notes (Class A notes) and (P)Baa2 to the Class B-1, Class B-2 and Class B-3 notes (Class B notes) of Series 2010-1 Rental Car Asset-Backed Notes to be issued by Hertz Vehicle Financing LLC (HVF or Issuer), a limited liability company whose sole member is The Hertz Corporation (Hertz). The Class A-1 notes and Class B-1 notes will have an expected maturity of approximately three years. The Class A-2 notes and Class B-2 notes will have an expected maturity of approximately five years. The Class A-3 notes and Class B-3 notes will have an expected maturity date of approximately seven years. The Class B notes will be subordinated to the Class A notes (Class A notes and together with the Class B notes, the Series 2010-1 notes). The complete rating action is as follows:

Issuer: Hertz Vehicle Financing LLC

[$] Series 2010-1 Rental Car Asset Backed Notes, Class A-1, rated (P)Aaa

[$] Series 2010-1 Rental Car Asset Backed Notes, Class A-2, rated (P)Aaa

[$] Series 2010-1 Rental Car Asset Backed Notes, Class A-3, rated (P)Aaa

[$] Series 2010-1 Rental Car Asset Backed Notes, Class B-1, rated (P)Baa2

[$] Series 2010-1 Rental Car Asset Backed Notes, Class B-2, rated (P)Baa2

[$] Series 2010-1 Rental Car Asset Backed Notes, Class B-3, rated (P)Baa2

The ratings are based, among other things, on the collateral, the presence of Hertz as lessee, the credit enhancements in the deal and the structural features of the transaction. The principal methodology used in rating the transaction is described below. 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 www.moodys.com.

This will be the first unwrapped rental car ABS transaction with a seven-year tranche for many years if not ever. The credit enhancement levels reflect the extra risks associated with a seven-year tranche, which Moody's assessed to be only moderately greater than the more typical five-year tranche, in light of the revolving nature of the transaction and the strength of Hertz as sponsor/lessee. In assessing credit enhancement levels, we analyzed additional stress runs focused on assessing sensitivity to greater fleet composition volatility.

TRANSACTION OVERVIEW

The Class A notes and the Class B notes will be issued by HVF which is a master trust structure under which all series of notes share the same pool of vehicles as collateral. The Series 2010-1 notes are secured by a first-priority perfected security interest in a collateral pool, shared with other series, which among other things primarily consists of eligible program and non-program vehicles from eligible manufacturers.

The repayment of these notes will be from three primary sources: (1) lease payments from Hertz under a master lease agreement, (2) payments from program manufacturers under their repurchase agreements, and (3) proceeds from the sale of non-program vehicles in the open market.

The Class A notes and the Class B notes will have revolving periods followed by controlled amortization periods if no rapid amortization event occurs. During the revolving period, the collateral for the notes may be sold and replaced and, unless a rapid amortization event has occurred, no payment of principal for any class of notes is required. Amortization events include, among other things, bankruptcies of Hertz or the Issuer, termination of the lease between the Issuer and Hertz, payment default under the lease and credit enhancement deficiencies.

The Class B notes will be subordinated in all respects to the Class A notes. [No payment of interest on the Class B notes will be made on any payment date unless all interest due on the Class A notes has been paid in full. During any controlled amortization period with regards to the three-year notes, five-year notes or seven-year notes, no payment of principal of the Class B notes will be made until the controlled distribution amount related to the Class A notes has been paid in full. During the rapid amortization period, no payment of principal of the Class B notes will be made unless and until the aggregate outstanding principal amount of Class A notes has been paid in full

Credit support for the Class A notes consists of a combination of subordination of Class B notes, overcollateralization, cash or letters of credit. Credit support for the Class B notes consists of a combination of overcollateralization, cash or letters of credit. The required minimum credit enhancement for the Class B notes expressed as a percentage of the adjusted principal amount of Class A notes and Class B notes consists of three buckets: (1) 25.0% for program vehicles from eligible manufacturers rated at least Baa2 (unlimited) or Baa3 (subject to a limit of 10% of the total securitized fleet by net book value); (2) 33.5% for all other program vehicles; and (3) 33.5% for non-program vehicles. Part of the credit enhancement will consist of minimum liquidity equal to at least six months of interest on the notes plus a cushion of at least 50 bps to cover operating and other expenses. The final required enhancement for Class B notes will be a blended rate depending on the fleet mix. The actual required amount of credit enhancement therefore fluctuates based on the mix of vehicles in the securitized fleet.

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.

The Medium V-score is largely driven by the average quality of historical data as well as the average performance variability for the Issuer and for the sector, the average collateral pool disclosure and ongoing disclosure of securitizations for the Issuer, and the medium transaction complexity and analytical complexity. The historical downgrade rate for the sector is worse than average. However, the governance for the transaction is better than average against other ABS assets.

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 ratings impact if (a) the current B1 rating of Hertz was to immediately decline to B3, Caa1, Caa2 and Caa3 and (b) the assumed modeled haircuts to estimated vehicle market values were increased by 5%, 10% and 15%. Haircuts are expressed as a percentage of the estimated market value of the vehicle collateral. We model potential vehicle collateral liquidation value by estimating market value and then applying haircuts. 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 the haircuts in the base case are determined by a triangular distribution with parameters of (5%, 15%, 30%), and this is increased by 5 percentage points, then the resulting stressed haircut would be determined by a triangular distribution with parameters of (10%, 20%, 35%).

Using such assumptions, the (P)Aaa initial model-indicated rating for the Series 2010-1 notes might change as follows: (a) with Hertz rated B1, the (P)Aaa initial note rating would remain unchanged under the base market value haircut, or if the market value haircut is increased by 5%, but would change to Aa1 if the market value haircut is increased by 10%, or change to Aa3 if the market value haircut is increased by 15%; (b) with Hertz rated B3, the (P)Aaa initial note rating would remain unchanged under the base market value haircut assumption or if the market value hair is increased by 5%, but would change to Aa1 if the market value haircut is increased by 10%, or change to Aa3 if the market value haircut is increased by 15%, (c) with Hertz rated Caa1, the (P)Aaa initial note rating would remain unchanged under the base market value haircut assumption or if the market value haircut is increased by 5%, but would change to Aa1 if the market haircut is increased by 10% or change to Aa3 if the market value haircut is increased by 15%;(d) with Hertz rated Caa2, the (P)Aaa initial note rating would remain unchanged under the base market value haircut assumption or if the market value haircut is increased by 5%, but would change to Aa2 if the market haircut is increased by 10% or change to A1 if the market value haircut is increased by 15%; and (e) with Hertz rated Caa3, the (P)Aaa initial note rating would remain unchanged under the base market value haircut assumption, or if the market value haircut is increased by 5%, but would change to Aa2 if the market value haircut is increased by 10%, or change to A2 if the market value haircut is increased by 15%.

Using such assumptions, the (P)Baa2 initial model-indicated rating for the Class B notes might change as follows: (a) with Hertz rated B1, the (P)Baa2 initial note rating would remain unchanged under the base market value haircut, but would change to Ba1 if the market value haircut is increased by 5%, or change to B2 if the market value haircut is increased by 10%, or change to below B3 if the market value haircut is increased by 15%; (b) with Hertz rated B3, the (P)Baa2 initial note rating would remain unchanged under the base market value haircut assumption, but would change to Ba2 if the market value hair is increased by 5%, or change to B3 if the market value haircut is increased by 10%, or change to below B3 if the market value haircut is increased by 15%, (c) with Hertz rated Caa1, the (P)Baa2 initial note rating would remain unchanged under the base market value haircut assumption or change to Ba2 if the market value haircut is increased by 5%, or change to B3 if the market haircut is increased by 10% or change to below B3 if the market value haircut is increased by 15%;(d) with Hertz rated Caa2, the (P)Baa2 initial note rating would remain unchanged under the base market value haircut assumption or change to Ba3 if the market value haircut is increased by 5%, or change to below B3 if the market haircut is increased by 10% or change to below B3 if the market value haircut is increased by 15%; and (e) with Hertz rated Caa3, the (P)Baa2 initial note rating would change to Baa3 under the base market value haircut assumption, or would change to B3 if the market value haircut is increased by 5%, or change to below B3 if the market value haircut is increased by 10%, or change to below B3 if the market value haircut is increased by 15%.

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 primary asset backing the notes is the monthly lease payments by Hertz as well as the pool of vehicles comprising the bulk of the Hertz daily rental car fleet, including both program vehicles (vehicles subject to repurchase, or guaranteed depreciation agreements provided by the related auto manufacturer) and non-program vehicles (vehicles that do not benefit from such repurchase or guaranteed depreciation agreements).

The key factors in Moody's rating analysis include the probability of default by Hertz, the likelihood of a bankruptcy or default by the auto manufacturers providing vehicles to the rental car fleet owned by the lessor, and the recovery rate on the rental car fleet in the event that Hertz defaults. Monte Carlo simulation modeling was used to assess the impact on bondholders of these variables.

The default probability of Hertz was simulated based on its current corporate probability of default rating and Moody's idealized default rates. We stress the rating of Hertz as lessee to provide a limited degree of de-linkage of the rated ABS from the corporate rating of the sponsor. With the Series 2010-1Class B notes we stressed the rating of Hertz by two notches to B3 to provide an additional degree of ratings stability given that the subordinate position of the Class B notes renders them more sensitive to credit risk factors particularly the sponsor's default risk. In contrast, for comparably rated senior notes, we would normally stress the sponsor's rating by only one notch.

Like all rental car companies, Hertz's fleet includes both program cars and non-program cars (also known as 'risk' cars). Under the terms of the simulation, in cases where Hertz does not default, it is assumed that bondholders are repaid in full and no liquidation of the Issuer's rental car fleet is necessary.

In cases where Hertz does default, the Issuer's fleet must be liquidated in order to repay the bondholders. In those cases, the default probability of the related auto manufacturers must also be simulated. Due to the Detroit Three's current highly uncertain credit status, their defaults were simulated based on estimates for probability of default provided by Moody's corporate analysts that incorporated the likelihood of both Chapter 7 and Chapter 11 bankruptcies. The default probability of other manufacturers is derived from their respective ratings. For each manufacturer simulated to be in Chapter 11, we further simulate whether each such manufacturer will honor its obligation with respect to program vehicles or default on the obligation.

In simulating liquidation of the rental car fleet following a Hertz 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 vehicle (risk) 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. 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 the Lessee's default contemplates potential legal challenges to obtaining control of the fleet and the potential difficulties of marshaling and selling such a large quantity 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%).

Slightly higher volatility of the fleet mix by manufacturer was assumed given greater potential for changes in fleet mix in a seven year tranche. Additional sensitivities were conducted to test the impact of extra volatility in the pool mix on the ratings on the notes.

ADDITIONAL RESEARCH

A pre-sale report for this transaction and reports for prior rental car ABS transactions from this sponsor, are available at www.moodys.com. Additional research, including 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 also 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.

New York
Michael McDermitt
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Xiaochao Wang
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns provisional rating of (P)Aaa and (P)Baa2 to Hertz-sponsored rental car ABS
No Related Data.
© 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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