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Rating Action:

Moody's assigns provisional ratings to Avis Budget Series 2011-3 senior-subordinate rental car ABS

25 Apr 2011

New York, April 25, 2011 -- Moody's Investors Service has assigned provisional ratings of (P)Aaa(sf) to the Series 2011-3 Class A fixed rate Rental Car Asset Backed Notes (Class A Notes) and (P)Baa2(sf) to the Series 2011-3 Class B fixed rate Rental Car Asset Backed Notes (Class B Notes and, together with the Class A notes, the Series 2011-3 Notes). The Series 2011-3 Notes, which have a 67 month expected final maturity, are expected to be 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).

As described in a separate press release, the Issuer is also planning to contemporaneously issue its Series 2011-1 and 2011-2 Notes with a 31 month and 43 month expected final maturity respectively.

Issuer: Avis Budget Rental Car Funding (AESOP) LLC, Series 2011-3

Series 2011-3 Class A Notes, Assigned (P)Aaa(sf)

Series 2011-3 Class B Notes, Assigned (P)Baa2(sf)

RATINGS RATIONALE

As further described below, the provisional ratings for the Series 2011-3 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.

The total enhancement requirement for the Series 2011-3 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) 32.50% for all other program vehicles; and (3) 35.25% 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 as a percentage of the outstanding note balance, rather than fleet vehicles. The Class A Notes also benefit from subordination provided by the Class B Notes representing 13% of the outstanding Series 2011-3 Note balance. This subordination percentage behind the Class A Notes will increase once principal amortization begins on the Class A Notes.

The Series 2011-3 Notes are to be 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 is expected to be designed to permit resale under Rule 144A.

The principal methodology used in rating the notes is described below. Other methodologies that may have been used can be found at www.moodys.com

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 B1, 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 Aa2 and A1 with each lower recovery assumption; (b) with ABCR rated B3, the Aaa initial note output would remain Aaa under both the base recovery and 5% increase in market value haircut assumptions but change to Aa3 and A1 with each lower recovery assumption; (c) with ABCR rated Caa1, the Aaa initial note output would remain Aaa under the base recovery but change to Aa1, Aa3 and A2 with each lower recovery assumption; (d) with ABCR rated Caa2, the Aaa initial note output would remain Aaa under the base recovery but change to Aa1, Aa3 and A3 with each lower recovery assumption; (e) with ABCR rated Caa3, the Aaa initial note output would remain Aaa under the base recovery but change to Aa1, Aa3 and A3 with each lower recovery assumption

Also using the above assumptions, the Baa1 initial model-indicated output for the Class B Notes might change as follows: (a) with ABCR rated B1, the Baa2 initial note output would remain at Baa2 using the base recovery assumption but change to Ba1, B1 and below B3 with each lower recovery assumption; (b) with ABCR rated B3, the Baa2 initial note output would remain Baa2 using the base recovery assumption but change to Ba2, B3 and below B3 with each lower recovery assumption; (c) with ABCR rated Caa1, the Baa2 initial note output would remain Baa2 using the base recovery assumption but change to Ba2, B3 and below B3 with each lower recovery assumption; (d) 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; (e) 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 car 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 in this transaction.

ADDITIONAL RESEARCH

A pre-sale report for this transaction is forthcoming. 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.

REGULATORY DISCLOSURES

Information source(s) used to prepare the credit rating is/are the following: are parties involved in the ratings, public information, 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
Jiang Xu
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Michael McDermitt
VP - Senior Credit Officer
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.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns provisional ratings to Avis Budget Series 2011-3 senior-subordinate 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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