$575 million of asset-backed securities rated.
New York, June 07, 2011 -- Moody's has assigned the provisional ratings of (P)Aaa (sf) to the Class
A-1 and Class A-2 notes (Class A notes) and (P)Baa2 (sf)
to the Class B-1 and Class B-2 notes (Class B notes and,
together with the Class A notes, the Series 2011-1 notes)
of the Series 2011-1 Rental Car Asset-Backed Notes to be
issued by Hertz Vehicle Financing LLC (HVF or Issuer), a limited
liability company whose sole member is The Hertz Corporation (Hertz).
The Class A-1 and Class B-1 notes will have an expected
maturity of approximately three years. The Class A-2 and
Class B-2 notes will have an expected maturity of approximately
five years. The Class B notes will be subordinated to the Class
A notes. The complete rating action is as follows:
Issuer: Hertz Vehicle Financing LLC
[$] Series 2011-1 Rental Car Asset Backed Notes,
Class A-1, rated (P)Aaa (sf)
[$] Series 2011-1 Rental Car Asset Backed Notes,
Class A-2, rated (P)Aaa (sf)
[$] Series 2011-1 Rental Car Asset Backed Notes,
Class B-1, rated (P)Baa2 (sf)
[$] Series 2011-1 Rental Car Asset Backed Notes,
Class B-2, rated (P)Baa2 (sf)
The ratings are based, among other things, on the collateral,
the presence of Hertz as lessee, credit enhancement 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.
Credit enhancement consists of overcollateralization and a minimum liquidity
requirement in the form of letter of credit or cash; and, for
the Class A notes, subordination provided by the Class B notes.
Overcollateralization levels vary. The lowest enhancement level
is 25%, the intermediary enhancement level is 32%
and the highest enhancement level is also 32%. See below
for further details.
TRANSACTION OVERVIEW
The Class A notes and the Class B notes will be issued by HVF which is
a master trust structure under which multiple series of notes share the
same pool of vehicles as collateral. The Series 2011-1 notes
are secured by a first-priority perfected security interest in
a collateral pool, shared with other series, which primarily
consists of among other things 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 or five-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) 32.0% for all other program
vehicles; and (3) 32.0% for non-program vehicles
and vehicles of bankrupt manufacturers. 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 2011-1 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 Aa2 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 Aa1 if the market
haircut is increased by 10% or change to Aa3 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 A1 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 Baa3 if
the market value haircut is increased by 5%, or change to
B1 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 Ba1 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 Ba1 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
Ba2 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
remain unchanged under the base market value haircut assumption,
or would change to Ba2 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 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%).
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.
REGULATORY DISCLOSURES
Information sources 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
Xiaochao Wang
Vice President - Senior 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 Hertz-sponsored rental car ABS
