$184.3million of asset-backed securities rated.
New York, June 09, 2010 -- Moody's has assigned the provisional rating of (P)Baa2 to the Series 2009-2
Rental Car Asset-Backed Notes, Class B-1 and Class
B-2 notes (Class B 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 B-1 notes will
have an expected maturity of three years while the Class B-2 notes
will have an expected maturity of five years. The Class B notes
will be subordinated to the Class A-1 notes and Class A-2
notes (Class A notes and together with the Class B notes, the Series
2009-2 notes), issued on October 23, 2009. The
complete rating action is as follows:
Issuer: Hertz Vehicle Financing LLC
[$76,800,000] Series 2009-2 Rental Car
Asset Backed Notes, Class B-1, rated (P)Baa2
[$107,500,000] Series 2009-2 Rental Car
Asset Backed Notes, Class B-2, 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.
TRANSACTION OVERVIEW
The Class B notes will be issued via amendments to the Series 2009-2
Indenture Supplement under which the Class A notes were issued.
The amendments will reflect changes necessary to facilitate the issuance
of the Class B notes, which aree permitted under the existing Series
2009-2 Indenture Supplement.
The Class A notes were, 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 2009-2
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. In addition, the Class
B notes will be secured by a first priority perfected interest in the
Class B notes collateral, which include all of HVF's rights,
title and interest in, to, and under (a) the Class B reserve
account, (b) each Class B letter of credit, (c) each Class
B cash collateral account and (d) to the extent not otherwise included,
all proceeds of the foregoing.
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.
Like the Class A notes, the Class B notes will have revolving periods
followed by controlled amortization periods if no 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, and no payment of principal of the Class B notes will
be made until the principal amount of the Class A notes is paid in full
provided that during the three-year notes controlled amortization
period, payment of principal on Class B-1 notes only can
be made on any payment date after the applicable Class A-1 controlled
distribution amount on such payment date has been paid and if no payment
of principal of the Class A-2 notes are due to be made.
Credit support for the Class B notes may be provided by a combination
of overcollateralization, cash or letters of credit. The
Class B notes will have their dedicated liquidity equal to at least [3.5]%
of the Class B adjusted principal amount. 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) 34.0% for all other program vehicles; and (3) 34.0%
for non-program vehicles. 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 Baa2 initial model-indicated
rating for the Class B notes might change as follows: (a) with Hertz
rated B1, the 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 B3
if the market value haircut is increased by 15%; (b) with
Hertz rated B3, the Baa2 initial note rating would remain unchanged
under the base market value haircut assumption, but would change
to Ba3 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 Baa2 initial note rating would change
to Baa3 under the base market value haircut assumption or change to B1
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%;(d)
with Hertz rated Caa2, the Baa2 initial note rating would change
to Baa3 under the base market value haircut assumption or change to B2
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 Baa2 initial note rating would
change to Ba1 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 2009-2 Class 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%).
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)Baa2 to Class B notes of Hertz 2009-2 rental car ABS
