New York, August 11, 2020 -- Moody's Investors Service (Moody's) has changed the direction
of review for 11 tranches of rental car asset-backed securities
(ABS) issued by Hertz Vehicle Financing II LP (HVF II or the issuer) to
under review for upgrade from under review for downgrade. HVF II
is a special purpose limited partnership and wholly-owned indirect
subsidiary of the transaction sponsor and single lessee, The Hertz
Corporation (Hertz). HVF II is Hertz's rental car securitization
platform in the U.S. The ultimate collateral backing the
notes is a fleet of vehicles and a single lease of the fleet to Hertz
under a master lease agreement for use in its rental car business.
Moody's actions on the rental car ABS are prompted by (1) the recent court-approved
order requiring Hertz to make lease payments and remit required vehicle
sales proceeds, increasing credit enhancement and alleviating some
performance uncertainty for the senior notes, provided Hertz honors
its obligations under the order, (2) current strong used vehicle
prices and sales volumes, although uncertainty remains, and
(3) the majority of the noteholders taking an active role in negotiating
a favorable short-term outcome in Hertz's Chapter 11 bankruptcy
proceedings that will result in the pay down of roughly half of the aggregate
balance of the senior notes. Moody's downgraded these ratings and
placed them under review for further downgrade on 29 May 2020.
Complete rating actions are as follows:
Issuer: Hertz Vehicle Financing II LP, Series 2015-3
Series 2015-3 Rental Car Asset Backed Notes, Class A,
Baa3 (sf) Placed Under Review for Possible Upgrade; previously on
May 29, 2020 Downgraded to Baa3 (sf) and Remained On Review for
Possible Downgrade
Issuer: Hertz Vehicle Financing II LP, Series 2016-2
Series 2016-2 Rental Car Asset Backed Notes, Class A,
Baa3 (sf) Placed Under Review for Possible Upgrade; previously on
May 29, 2020 Downgraded to Baa3 (sf) and Remained On Review for
Possible Downgrade
Issuer: Hertz Vehicle Financing II LP, Series 2016-4
Series 2016-4 Rental Car Asset Backed Notes, Class A,
Baa3 (sf) Placed Under Review for Possible Upgrade; previously on
May 29, 2020 Downgraded to Baa3 (sf) and Remained On Review for
Possible Downgrade
Issuer: Hertz Vehicle Financing II LP, Series 2017-1
Class A Notes, Baa3 (sf) Placed Under Review for Possible Upgrade;
previously on May 29, 2020 Downgraded to Baa3 (sf) and Remained
On Review for Possible Downgrade
Issuer: Hertz Vehicle Financing II LP, Series 2017-2
Class A Notes, Baa3 (sf) Placed Under Review for Possible Upgrade;
previously on May 29, 2020 Downgraded to Baa3 (sf) and Remained
On Review for Possible Downgrade
Issuer: Hertz Vehicle Financing II LP, Series 2018-1
Class A Notes, Baa3 (sf) Placed Under Review for Possible Upgrade;
previously on May 29, 2020 Downgraded to Baa3 (sf) and Remained
On Review for Possible Downgrade
Issuer: Hertz Vehicle Financing II LP, Series 2018-2
Class A Notes, Baa3 (sf) Placed Under Review for Possible Upgrade;
previously on May 29, 2020 Downgraded to Baa3 (sf) and Remained
On Review for Possible Downgrade
Issuer: Hertz Vehicle Financing II LP, Series 2018-3
Class A Notes, Baa3 (sf) Placed Under Review for Possible Upgrade;
previously on May 29, 2020 Downgraded to Baa3 (sf) and Remained
On Review for Possible Downgrade
Issuer: Hertz Vehicle Financing II LP, Series 2019-1
Class A Notes, Baa3 (sf) Placed Under Review for Possible Upgrade;
previously on May 29, 2020 Downgraded to Baa3 (sf) and Remained
On Review for Possible Downgrade
Issuer: Hertz Vehicle Financing II LP, Series 2019-2
Class A Notes, Baa3 (sf) Placed Under Review for Possible Upgrade;
previously on May 29, 2020 Downgraded to Baa3 (sf) and Remained
On Review for Possible Downgrade
Issuer: Hertz Vehicle Financing II LP, Series 2019-3
Class A Notes, Baa3 (sf) Placed Under Review for Possible Upgrade;
previously on May 29, 2020 Downgraded to Baa3 (sf) and Remained
On Review for Possible Downgrade
RATINGS RATIONALE
Moody's actions on the rental car ABS are prompted by (1) the recent court-approved
order requiring Hertz to make lease payments and remit required vehicle
sales proceeds, increasing credit enhancement and alleviating some
performance uncertainty for the senior notes, provided Hertz honors
its obligations under the order (see description of order below),
(2) current strong used vehicle prices and sales volumes, although
uncertainty remains, and (3) ABS holders taking an active role in
negotiating a favorable short-term outcome in Hertz's Chapter
11 bankruptcy proceedings, which demonstrates the effectiveness
of decision-making among Hertz and the noteholders in coming to
their agreement. The ABS holders (including the VFN holders) have
been actively represented throughout the Hertz bankruptcy by Deutsche
Bank AG, the Bank of New York Mellon Trust Company, N.A,
and a group of institutions that hold around $1 billion in medium-term
notes, serving in different capacities.
If Hertz fulfills its obligations under the court order, the credit
enhancement supporting the Class A notes would increase to about 49%
in December from 34% in June. The lease payments and required
vehicle disposition proceeds equate to around 53% of the senior
ABS outstanding as of 30 June 2020.
However, uncertainties remain including:
(1) Hertz's potentially weaker liquidity position through December
2020, after covering $650 million in lease payments out of
pocket, potential true up payments related to the required vehicle
disposition proceeds and cash burn from operating its business if fleet
utilization continues to be depressed, unless the company secures
a new liquidity source,
(2) potential payment disruptions to the notes if Hertz fails to secure
sufficient liquidity when the court order expires. Moody's
estimates that the current amount available under the letters of credit
(LOC) is sufficient to cover interest on the notes and expenses until
December,
(3) the timing of Hertz emerging from bankruptcy and the outcome,
which could include Hertz failing to reach another agreement with the
noteholders after December or continuing with its motion to reject certain
unexpired vehicle leases,
(4) the challenging conditions in the rental car market, including
the severe drop in fleet utilization and the heightened uncertainty around
Hertz's ability to honor its full lease payment obligation after the order
expires in December,
(5) future used vehicle market conditions, including any negative
effects of a resurgence of COVID-19 and the volume of sales from
some US rental car companies' in their efforts to de-fleet,
among other factors,
(6) the percentage of program vehicles, which will likely decrease
further owing to Hertz continuing to de-fleet, which could
lead to a decline in our program vehicle percentage assumption,
(7) other qualitative and quantitative factors, such as legal uncertainty
after January 15, 2021, involving bankruptcy court decisions,
the likelihood that the lease is accepted in full, and the timing
of liquidations.
During the review period, Moody's will continue to monitor
and assess:
(1) the sufficiency of Hertz's liquidity to make the required payments
under the court-approved order,
(2) Hertz fulfilling its obligations under the court-approved order,
including the amount of lease payments, vehicle disposition proceeds,
and true up payments remitted each month
(3) the deleveraging of the senior notes and resulting increase in credit
enhancement supporting the notes if the parties honor their obligations
under the court order which could result in upgrade pressure for the senior
notes,
(4) credit enhancement available to support the notes, as over-collateralization
in the form of vehicles and as measured by the net book value (NBV) of
the vehicle fleet, after the order expires,
(5) payment disruption risks and the sufficiency of funds available under
the LOCs to cover timely interest on the Class A notes,
(6) rental car market conditions, including rental demand and fleet
utilization,
(7) the liquidity of the used vehicle market, and sales volume and
prices, which is currently favorable and may result in a lower value
haircut assumption applied to non-program vehicles upon Hertz's
default provided the positive conditions remain for a sustained period,
(8) the percentage of program vehicles in the underlying fleet collateral,
other qualitative and quantitative factors, such as legal uncertainty
after January 15, 2021, involving bankruptcy court decisions,
the likelihood that the lease is accepted in full, and the timing
of liquidations.
The rapid spread of the coronavirus outbreak, the government measures
put in place to contain it and the deteriorating global economic outlook,
have created a severe and extensive credit shock across sectors,
regions and markets. Our analysis has considered the effect on
the performance of consumer and commercial obligors from the collapse
in US economic activity in the second quarter and a gradual recovery in
the second half of the year. However, that outcome depends
on whether governments can reopen their economies while also safeguarding
public health and avoiding a further surge in infections. As a
result, the degree of uncertainty around our forecasts is unusually
high. We regard the coronavirus outbreak as a social risk under
our ESG framework, given the substantial implications for public
health and safety.
The car rental sector has been one of the sectors most significantly affected
by the coronavirus-driven credit shock given its heavy dependence
on air travel and on the sale of used vehicles. While conditions
in the used car market are presently constructive, air travel has
fallen precipitously.
In its ABS ratings analysis, Moody's assessed the combined
effect of new developments that have occurred since its prior rating actions.
Since filing for Chapter 11 bankruptcy on 22 May, Hertz has been
engaged in negotiations with its HVF II ABS holders to reduce the amount
of its lease payments. After missing its April lease payment and
defaulting on the master lease agreement, Hertz filed a motion to
reject the unexpired leases of 144,372 vehicles on the grounds that
the master lease agreement is divisible. In the unlikely scenario
of the court allowing a partial rejection of the master lease, Hertz
would not honor its contractual lease obligations related to those vehicles.
Instead, Hertz would liquidate the vehicles and the sales proceeds
would be used to repay the notes.
On 24 July 2020, the US Bankruptcy Court for the District of Delaware
approved a court order, temporarily resolving certain matters related
to the master lease agreement. Once this order expires, Hertz
may file another motion to reject any remaining unexpired leases.
Under the order:
(1) Hertz will make a monthly lease payment of $108.3 million
in July 2020 through December 2020, or $650 million in total,
to cover most of the depreciation on the vehicles.
(2) The pre-existing LOCs will be drawn to cover interest on the
notes and senior fees.
(3) Hertz must dispose of 182,521 vehicles (around 40% of
the underlying fleet), or around 26,000 per month, producing
cash flow that supports the senior notes. The order sets a front-loaded
schedule for a required amount of vehicle disposition proceeds of $3.9
billion from June to December. Hertz's vehicle sales must yield
the required proceeds each month. If the proceeds fall short,
Hertz must make a payment to meet the requirement.
(4) From July 2020 to December 2020, the depreciation charge with
respect to each non-program vehicle will be at least 2.00%
per month of the NBV of the vehicle.
(5) Hertz is authorized to retain up to 40,000 of the total amount
of vehicles to be liquidated by purchasing or leasing the vehicles.
(6) Hertz may retain $900 of the sales proceeds for each vehicle
sold through its retail channel.
Today's rating actions also reflect the improvement in vehicle liquidation
prices of non-program vehicles. Used vehicle sales volumes
and pricing began to improve in late April and increased considerably
in May through the end of July, enabling rental car companies to
de-fleet at prices similar to those prior to the pandemic.
Continued pent-up demand, dealer inventory needs and fear
of mass transit have bolstered the demand for used vehicles and their
prices. However, demand will normalize as the pent-up
demand and dealer inventory needs are satisfied. Market conditions
could turn if the coronavirus crisis deepens or economic conditions weaken.
According to the 6 August J.D. Power Used Market Update,
around 402,000 used vehicles were sold in the wholesale auction
market in the four weeks that ended July 26, close to the typical
US sales volume prior to the pandemic. Used car prices have increased
30% over the past 12 weeks, considerably higher than the
trough decline of 17% in mid-April.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was "Moody's Global
Approach to Rating Rental Fleet Securitizations" published in July 2020
and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1232483.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Factors that would lead to an upgrade or downgrade of the ratings:
Up
Moody's could upgrade the ratings of the notes as applicable if,
among other things, (1) the ultimate outcome of the bankruptcy process
is favorable to the Class A noteholders owing to a controlled liquidation
of the vehicles in a sustained liquid market, resulting in a meaningful
increase in credit enhancement supporting the Class A notes, (2)
the credit quality of the lessee improves, (3) sustained improvement
in the car rental market resulting in higher utilization of the vehicle
fleet, and (4) sustained improvement in the demand for used vehicles
resulting in higher volumes and prices above Moody's assumed depreciation.
Down
Moody's could downgrade the ratings of the notes if, among other
things, (1) the ultimate outcome of the bankruptcy process is unfavorable
to Class A noteholders, for example, one that results in an
extended timeline to liquidate the vehicles coinciding with a sustained
weakness in the used-vehicle market, combined with prolonged
disruptions to used-car sales channels, resulting in a meaningful
decrease in credit enhancement supporting the Class A notes, (2)
reduced demand for used vehicles results in lower volumes and sharp declines
in used vehicle prices above Moody's assumed depreciation,
(3) increased operational and legal risks during the bankruptcy process
adversely affects Class A noteholders, or (4) the tail periods,
particularly for the series 2015-3 and 2017-1 notes that
have maturities in 2021, are insufficient for vehicle disposition
proceeds to repay the notes owing to prolonged closures of sales channels
or other reasons.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
In rating this transaction, Moody's used a cash flow model
to model cash flow stress scenarios to determine the extent to which investors
would receive timely payments of interest and principal in the stress
scenarios, given the transaction structure and collateral composition.
Moody's quantitative analysis entails an evaluation of scenarios
that stress factors contributing to sensitivity of ratings and take into
account the likelihood of severe collateral losses or impaired cash flows.
Moody's weights the impact on the rated instruments based on its
assumptions of the likelihood of the events in such scenarios occurring.
For ratings issued on a program, series, category/class of
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same series, category/class of debt, security or pursuant
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Chloe Zhang
Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Karen Ramallo
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
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