Approximately $4.3 billion asset-backed securities affected
New York, April 27, 2020 -- Moody's Investors Service (Moody's) has downgraded and placed on review
for further possible downgrade 11 tranches of rental car asset-backed
securities (ABS) issued by Hertz Vehicle Financing II LP (HVF II,
or the issuer). HVF II is a special purpose limited partnership
and a wholly-owned indirect subsidiary of The Hertz Corporation
(Hertz; Caa3, negative). HVF II is Hertz's rental car
securitization platform in the U.S. The collateral backing
the notes is a fleet of vehicles and a single lease of the fleet to Hertz
for use in its rental car business.
Moody's actions on the rental car ABS are prompted by the significant
deterioration in the credit profile of Hertz (the lessee), as evidenced
by recent rating actions resulting in the downgrade of the company's
corporate family rating (CFR) to Caa3 (negative outlook) from B3 (negative
outlook), among other considerations.
Complete rating actions as follow:
Issuer: Hertz Vehicle Financing II LP, Series 2015-3
Series 2015-3 Rental Car Asset Backed Notes, Class A,
Downgraded to A1 (sf) and Placed Under Review for Possible Downgrade;
previously on May 9, 2017 Affirmed Aaa (sf)
Issuer: Hertz Vehicle Financing II LP, Series 2016-2
Series 2016-2 Rental Car Asset Backed Notes, Class A,
Downgraded to A1 (sf) and Placed Under Review for Possible Downgrade;
previously on May 9, 2017 Affirmed Aaa (sf)
Issuer: Hertz Vehicle Financing II LP, Series 2016-4
Series 2016-4 Rental Car Asset Backed Notes, Class A,
Downgraded to A1 (sf) and Placed Under Review for Possible Downgrade;
previously on May 9, 2017 Affirmed Aaa (sf)
Issuer: Hertz Vehicle Financing II LP, Series 2017-1
Class A Notes, Downgraded to A1 (sf) and Placed Under Review for
Possible Downgrade; previously on Sep 20, 2017 Definitive Rating
Assigned Aaa (sf)
Issuer: Hertz Vehicle Financing II LP, Series 2017-2
Class A Notes, Downgraded to A1 (sf) and Placed Under Review for
Possible Downgrade; previously on Sep 20, 2017 Definitive Rating
Assigned Aaa (sf)
Issuer: Hertz Vehicle Financing II LP, Series 2018-1
Class A Notes, Downgraded to A1 (sf) and Placed Under Review for
Possible Downgrade; previously on Jan 24, 2018 Definitive Rating
Assigned Aaa (sf)
Issuer: Hertz Vehicle Financing II LP, Series 2018-2
Class A Notes, Downgraded to A1 (sf) and Placed Under Review for
Possible Downgrade; previously on Jun 27, 2018 Definitive Rating
Assigned Aaa (sf)
Issuer: Hertz Vehicle Financing II LP, Series 2018-3
Class A Notes, Downgraded to A1 (sf) and Placed Under Review for
Possible Downgrade; previously on Jun 27, 2018 Definitive Rating
Assigned Aaa (sf)
Issuer: Hertz Vehicle Financing II LP, Series 2019-1
Class A Notes, Downgraded to A1 (sf) and Placed Under Review for
Possible Downgrade; previously on Feb 6, 2019 Definitive Rating
Assigned Aaa (sf)
Issuer: Hertz Vehicle Financing II LP, Series 2019-2
Class A Notes, Downgraded to A1 (sf) and Placed Under Review for
Possible Downgrade; previously on May 29, 2019 Definitive Rating
Assigned Aaa (sf)
Issuer: Hertz Vehicle Financing II LP, Series 2019-3
Class A Notes, Downgraded to A1 (sf) and Placed Under Review for
Possible Downgrade; previously on Nov 26, 2019 Definitive Rating
Assigned Aaa (sf)
RATINGS RATIONALE
Moody's actions are prompted by the significant deterioration in the credit
profile of Hertz (the lessee) and the higher likelihood that the company
will face a cash and liquidity shortfall, as evidenced by recent
rating actions. Rental car ABS transactions securitize a single
lease, making performance partly dependent on the financial health
of the rental car company lessee.
On April 24, 2020, Moody's downgraded Hertz's CFR to
Caa3 from B3. The outlook remains negative. The rating action
reflects the better-than-even likelihood that the company
will face a cash and liquidity shortfall, potentially as soon as
during the second quarter. This shortfall will likely require some
form of relief from its lenders. With air travel having fallen
by over 90% and likely to remain depressed through 2020,
Hertz's revenues and earnings have declined precipitously.
The company's earnings and cash flow will become significantly negative,
and it is highly over-fleeted. As a result of Hertz's
inability to begin de-fleeting in line with the collapsing utilization
of its rental fleet early in April, the company's cash burn
could exhaust its cash resources during the second quarter.
The car rental sector has been one of the sectors most significantly affected
by the coronavirus-induced economic shock given its heavy dependence
on air travel and on the sale of used vehicles. Business activity
in these markets, which are critical to Hertz's ongoing operations,
have fallen precipitously, thereby resulting in a large monthly
operating cash burn and a severe near-term liquidity shortfall.
During late March and into April the normally quite stable and large market
for used cars has contracted at an unprecedented pace given the closure
of most auctions. Moody's believes prices have fallen by
at least 10% for the very low volume of cars that may have traded.
In its ABS rating analysis, Moody's continues to assume that
in the event of insolvency, Hertz will be more likely to reorganize
under a Chapter 11 bankruptcy filing, as it would likely realize
significantly more value as an ongoing business concern than it would
if it were to liquidate its assets under a Chapter 7 filing. Moody's
view considers the strength of the Hertz brand (one of the three major
car rental companies in North America) and the expected eventual recovery
of the rental car industry. Moody's now believes that there
is a considerably higher probability that Hertz will seek to negotiate
changes to its lease payment terms. While Moody's recognizes
the strategic importance of the ABS financing platform to Hertz's
operation, the company will face difficulty in honoring its large
lease payment obligations to the trust considering its challenging financial
situation for the remainder of 2020 and its low fleet utilization.
Given the unprecedented market dislocation and the currently illiquid
market for used-vehicles, certain ABS noteholders may wish
to extend some form of lease payment relief to Hertz to avoid a fire sale
of the entire fleet of vehicles. However, the parties may
face logistical challenges in implementing any operational and legal procedures
required to potentially negotiate and optimize lease terms.
In taking today's action, Moody's also considered the
weakening credit quality of several original equipment manufacturers (OEMs)
in Hertz's vehicle fleet. Moody's recently placed the ratings
of the three largest OEMs in the underlying fleet on review for downgrade
as follows: General Motors Company (senior unsecured rating of Baa3
under review for downgrade, previously Baa3 stable, approximately
35% of the vehicle fleet), Fiat Chrysler Automobiles N.V.
(CFR of Ba1 under review with direction uncertain, previously Ba1
positive, approximately 16% of the vehicle fleet),
Ford Motor Company (senior unsecured rating of Ba2 under review for downgrade,
previously Ba1 stable, approximately 12% of the vehicle fleet)
and Nissan Motor Co., Ltd. (senior unsecured rating
of Baa3, under review for downgrade, previously Baa1,
negative, approximately 12% of the vehicle fleet).
These rating actions on the OEMs reflect the severe economic shock owing
to the coronavirus pandemic.
The automotive industry has been one of the sectors most significantly
affected by the shock given its sensitivity to consumer demand and sentiment.
The performance of rental car ABS is dependent on the credit quality of
the OEMs because, if a vehicle manufacturer bankruptcy were to occur,
the risk that the manufacturer would not satisfy its repurchase obligations
for program vehicles (roughly 17% of the underlying vehicles) would
increase. Also, used-vehicle values for that manufacturer
would likely decline, decreasing the value of the fleet collateral
available to repay the notes. In taking today's action,
Moody's updated its assumptions for the OEM mix to weight lower
rating categories slightly more heavily.
Today's rating actions also reflect heightened uncertainty,
owing to the unprecedented operating environment, with respect to
certain factors including:
(1) if and under what market conditions the trust will be forced to liquidate
vehicles, and the effectiveness of any related decision-making
process involving numerous parties and noteholders,
(2) the duration of the shutdown of certain used-vehicles sales
channels owing to the pandemic, which has resulted in an unprecedented,
illiquid secondary market,
(3) the magnitude of used vehicle price declines resulting from the sudden
halt in demand for vehicles, the unprecedented shock to global air
travel and Hertz's heavy reliance on revenue from customers'
foot traffic at airports, relative to available overcollateralization,
(4) the sufficiency of the amortization tail period for certain notes,
particularly for those maturing in 2021, if the used-vehicle
sales channels remain closed or experience significant volume declines
for a prolonged period,
(5) the sufficiency of required liquidity in the form of a letter of credit
(LOC) covering six months of interest due on the notes in the event of
a lease payment default should the entire fleet need to be disposed of
in a challenging and depressed used-vehicle market; the LOCs
have a term of only one-year and therefore when some expire in
2020 the issuer is required to either extend the LOCs or fund the required
amount in cash, and
(6) the legal risks to the trust in the event of a sponsor bankruptcy.
The high ratings on all series of Class A notes are supported by (1) the
available credit enhancement, which consists of subordination and
overcollateralization, totaling approximately 36%,
on average, to protect investors against a meaningful decline in
the value of the underlying vehicles, (2) the credit quality of
the collateral in the form of rental fleet vehicles, which Hertz
uses in its rental car business under brand names Hertz and Dollar Thrifty,
(3) the low likelihood of a Chapter 7 liquidation, (4) required
liquidity in the form of cash and/or a letter of credit sized at roughly
six months of interest, (5) the track-record, experience
and expertise of Hertz as the servicer of the rental fleet and the administrator
for HVF II, and (6) the transaction structure and other qualitative
considerations. Given the unprecedented shock to the car rental
sector, the degree of uncertainty is unusually high and further
ratings downgrades may be warranted.
Moody's analysis considered the increased uncertainty relating to
the effect of the coronavirus outbreak on the US economy, as well
as the effects that the announced government measures put in place to
contain the virus will have on the performance of corporate assets.
Moody's regards the coronavirus outbreak as a social risk under
our ESG framework, given the substantial implications for public
health and safety. It is a global health shock, which makes
it extremely difficult to provide an economic assessment. The degree
of uncertainty around our forecasts is unusually high.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was "Moody's Global Approach
to Rating Rental Fleet Securitizations" published in March 2019 and available
at https://www.moodys.com/research/Moodys-Global-Approach-to-Rating-Rental-Fleet-Securitizations--PBS_1111706.
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 credit quality of the lessee improves,
(2) assumptions of the credit quality of the pool of vehicles collateralizing
the transaction strengthens, as reflected by a stronger mix of program
and non-program vehicles and stronger credit quality of vehicle
manufacturers, and (3) sustained improvement in the vehicle prices
of non-program vehicles owing to higher demand for used vehicles
and the increase in volumes of used-car sales.
Down
Moody's could downgrade the ratings of the notes if, among other
things, (1) the credit quality of the lessee weakens and it is unable
to meet its lease payment obligations, (2) an increase in the likelihood
of a sudden disposition of the underlying vehicles in a depressed used-vehicle
market combined with an unprecedented, illiquid secondary market,
(3) the credit quality of the pool of vehicles collateralizing the transaction
weakens, as reflected by a weaker mix of program and non-program
vehicles and weaker credit quality of vehicle manufacturers, (4)
sharper than expected declines in vehicle prices of non-program
vehicles owing to sustained weakness in the demand for used vehicles and
prolonged disruptions to used-car sales channels, (5) the
trust faces potentially rising legal risks in this unprecedented environment,
or (6) the tail periods, particularly for the series 2015-3
and 2017-1 notes that have maturities in 2021, are insufficient
because sales channels remain closed for a prolonged period and therefore
vehicle disposition proceeds are insufficient to repay the notes.
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
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
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For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
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if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
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Regulatory disclosures contained in this press release apply to the credit
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review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
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for additional regulatory disclosures for each credit rating.
Corina Teodora Bot
Associate Lead 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.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
