Approximately $4.3 billion asset backed securities affected
NOTE: On August 18, 2020, the press release was corrected as follows: The second sentence of the seventh paragraph of the Ratings Rationale section was changed to: “ Firstly, Hertz failed to make full monthly lease payments to the Issuer in April and May, triggering an amortization event under the transaction documents that govern the ABS and eroding the level of credit enhancement supporting the notes.” Revised release follows.
New York, May 29, 2020 -- Moody's Investors Service (Moody's) has downgraded 11 tranches
of rental car asset-backed securities (ABS) issued by Hertz Vehicle
Financing II LP (HVF II, or the Issuer). All 11 tranches
remain on review for possible further downgrade. HVF II is a special
purpose limited partnership and wholly-owned indirect subsidiary
of The Hertz Corporation (Hertz; Ca). 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 for use in its rental car business.
Moody's actions on the ABS are primarily prompted by 1) Hertz's
Chapter 11 bankruptcy filing on 22 May 2020, without a pre-negotiated
plan with noteholders to amend the lease, and the high likelihood
of a liquidation of all or a large portion of the fleet of vehicles following
the bankruptcy filing, 2) increased risk around the amount of proceeds
that will be derived from the sale of the vehicle fleet and sale timing,
given the challenging market conditions that the used car market continues
to face as a result of the COVID-19-induced shock,
and 3) uncertainty related to the outcome of the bankruptcy.
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,
Downgraded to Baa3 (sf) and Remains On Review for Possible Downgrade;
previously on Apr 27, 2020 Downgraded to A1 (sf) and Placed Under
Review for Possible Downgrade
Issuer: Hertz Vehicle Financing II LP, Series 2016-2
Series 2016-2 Rental Car Asset Backed Notes, Class A,
Downgraded to Baa3 (sf) and Remains On Review for Possible Downgrade;
previously on Apr 27, 2020 Downgraded to A1 (sf) and Placed Under
Review for Possible Downgrade
Issuer: Hertz Vehicle Financing II LP, Series 2016-4
Series 2016-4 Rental Car Asset Backed Notes, Class A,
Downgraded to Baa3 (sf) and Remains On Review for Possible Downgrade;
previously on Apr 27, 2020 Downgraded to A1 (sf) and Placed Under
Review for Possible Downgrade
Issuer: Hertz Vehicle Financing II LP, Series 2017-1
Class A Notes, Downgraded to Baa3 (sf) and Remains On Review for
Possible Downgrade; previously on Apr 27, 2020 Downgraded to
A1 (sf) and Placed Under Review for Possible Downgrade
Issuer: Hertz Vehicle Financing II LP, Series 2017-2
Class A Notes, Downgraded to Baa3 (sf) and Remains On Review for
Possible Downgrade; previously on Apr 27, 2020 Downgraded to
A1 (sf) and Placed Under Review for Possible Downgrade
Issuer: Hertz Vehicle Financing II LP, Series 2018-1
Class A Notes, Downgraded to Baa3 (sf) and Remains On Review for
Possible Downgrade; previously on Apr 27, 2020 Downgraded to
A1 (sf) and Placed Under Review for Possible Downgrade
Issuer: Hertz Vehicle Financing II LP, Series 2018-2
Class A Notes, Downgraded to Baa3 (sf) and Remains On Review for
Possible Downgrade; previously on Apr 27, 2020 Downgraded to
A1 (sf) and Placed Under Review for Possible Downgrade
Issuer: Hertz Vehicle Financing II LP, Series 2018-3
Class A Notes, Downgraded to Baa3 (sf) and Remains On Review for
Possible Downgrade; previously on Apr 27, 2020 Downgraded to
A1 (sf) and Placed Under Review for Possible Downgrade
Issuer: Hertz Vehicle Financing II LP, Series 2019-1
Class A Notes, Downgraded to Baa3 (sf) and Remains On Review for
Possible Downgrade; previously on Apr 27, 2020 Downgraded to
A1 (sf) and Placed Under Review for Possible Downgrade
Issuer: Hertz Vehicle Financing II LP, Series 2019-2
Class A Notes, Downgraded to Baa3 (sf) and Remains On Review for
Possible Downgrade; previously on Apr 27, 2020 Downgraded to
A1 (sf) and Placed Under Review for Possible Downgrade
Issuer: Hertz Vehicle Financing II LP, Series 2019-3
Class A Notes, Downgraded to Baa3 (sf) and Remains On Review for
Possible Downgrade; previously on Apr 27, 2020 Downgraded to
A1 (sf) and Placed Under Review for Possible Downgrade
RATINGS RATIONALE
In taking today's rating actions, Moody's considered:
(1) The high likelihood of a liquidation of all or a large portion of
the fleet of vehicles, following Hertz's Chapter 11 bankruptcy
filing on 22 May 2020 without a pre-negotiated plan with noteholders
to amend the lease, and which did not include the special purpose
vehicles of the ABS transactions;
(2) A significant increase in our assumed haircut to the net book value
of the non-program vehicles to reflect greater uncertainty for
current and future used car market conditions, including prices
and volumes;
(3) The assumed available credit enhancement of 32%, which
is a 4% decline from the month of March, owing to the missed
lease payments in April and May; and
(4) Other qualitative and quantitative factors, such as legal uncertainty
involving bankruptcy court decisions and the timing of liquidations.
On 27 April 2020, Moody's downgraded the affected notes to
A1 (sf) from Aaa (sf) and placed the ratings under review for possible
downgrade, following the downgrade of Hertz's corporate family
rating (CFR) to Caa3 (negative outlook) from B3 (negative outlook) on
24 April 2020.
In its ABS ratings analysis, Moody's assessed the combined
effect of new developments that have occurred since its prior rating actions.
Firstly, Hertz failed to make full monthly lease payments to the
Issuer in April and May, triggering an amortization event under
the transaction documents that govern the ABS and eroding the level of
credit enhancement supporting the notes. Secondly, Hertz
announced on 22 May 2020 that it was unable to secure longer-term
lease payment relief with VFN and ABS noteholders (the company had secured
short-term relief from VFN noteholders initially). Thirdly,
on 22 May 2020 Hertz filed for Chapter 11 bankruptcy reorganization without
a pre-negotiated plan with noteholders to amend the lease.
The Issuer and its parent, Hertz Vehicle Financing (the lessor),
were not included in the Chapter 11 bankruptcy filing. The lessor
is a wholly owned subsidiary of Hertz.
Moody's assumes the liquidation of the entire fleet of vehicles
to be highly likely following Hertz's bankruptcy proceedings.
While Moody's recognizes the strategic importance of the underlying vehicles
and the ABS financing platform to Hertz's operations, it is highly
unlikely that the company could sustain all current lease payment obligations,
owing to Hertz's current liquidity position, dire financial
situation and low fleet utilization. Prospects for alternative
outcomes are uncertain and may include Hertz and the noteholders agreeing
to restructure the lease terms while Hertz is in bankruptcy, subject
to the bankruptcy court and the creditors' committee. Hertz
would benefit from liquidating a large portion of its fleet, given
the depressed demand for rental cars, in return for a reduced lease
payment.
Today's rating actions also reflect Moody's more stressful
assumed haircut to the vehicle liquidation prices of non-program
vehicles to reflect the greater uncertainty around those prices.
The fleet disposition will likely coincide with challenging market conditions,
including (1) possibly lower demand for used vehicles resulting from the
reduced mobility of the population due to the pandemic and the recession
that will continue to squeeze consumers' finances and disposable
income, which may, in turn, affect prices, (2)
a relatively high supply of used vehicles available for sale as highly
over-fleeted rental car companies sell large portions of their
fleets in response to lower utilization, which will likely continue
to affect prices, and (3) the lingering effects of the fragile,
though gradually improving, conditions in the wholesale used-vehicle
market and auction channels.
The car rental sector has been one of the worst-hit by the COVID-19-induced
credit shock due to the sudden and dramatic decline in air travel volumes
and the shutdown of certain used vehicle sales channels, the scope
and magnitude of which are unprecedented. Business activity in
these markets, which are critical to Hertz's ongoing operations,
fell precipitously following the outbreak of COVID-19 in the U.S.,
thereby resulting in a large monthly operating cash burn and a liquidity
shortfall, as well as an abrupt decline in revenue and future bookings.
Unlike the US airline industry, the US rental car industry has not
secured direct government assistance in the wake of the pandemic.
During late March and into April the normally quite stable and large market
for used cars contracted at an unprecedented pace given the closure of
most auctions and other sales channels. In recent weeks,
the market has gradually recovered, with wholesale auction sales
volumes reaching around 82% of pre-COVID-19 expectations
as of the week ending 17 May 2020 according to J.D. Power[1].
Moody's Analytics reported a cumulative wholesale used vehicle price
decline since the outbreak of the pandemic of 17.6% in 2020
and through 13 May 2020[2].
In its modeling analysis, Moody's assumed a simulated haircut
to the fleet's net book value with a distribution that addresses
the potential variability associated with the disposal of the fleet.
The longer the actual liquidation period, the greater the erosion
of credit enhancement available to support the senior notes owing to depreciation.
However, more favorable market conditions may arise over a longer
timeframe, potentially leading to higher used vehicle sales prices
than those implied by the assumed haircut. Alternatively,
a shorter liquidation period would lead to lower credit enhancement erosion
due to depreciation. However, the full liquidation of this
large fleet within a concentrated period could depress used-vehicle
sales prices and sale proceeds, especially as other rental car companies
de-fleet.
Moody's haircuts reflect (1) the potential effects of vehicle depreciation
during a three-month automatic stay in Hertz's bankruptcy
and the liquidation period, (2) declines in used vehicle prices,
(3) vehicle theft or damage during the bankruptcy stay and liquidation
period, and (4) the possibility that vehicle manufacturer bankruptcies
could depress used-vehicle values for the defaulting manufacturers.
During the review period, Moody's will continue to monitor
and assess:
(1) Market conditions, including rental fleet utilization,
the liquidity of the used-vehicle secondary markets, trends
in the demand for used-vehicles and their prices, including
further disruptions from COVID-19;
(2) Fleet liquidation outcomes, including the level of depreciation
of the fleet during the liquidation process, the amount of liquidation
proceeds, disposition timelines, and whether proceeds from
disposing vehicles is expected to result in sufficient funds to make the
required payments on the ABS by the notes' legal final maturity
dates (rated notes mature as early as September 2021);
(3) Legal and operational risks, including the effectiveness of
decision-making among Hertz and the noteholders, the performance
and capabilities of key counterparties including the back-up disposition
agent, the servicer, the administrator and the trustee,
the effectiveness of any transfer mechanisms to ensure back-up
arrangements are in place for vehicle disposition and administration,
and the impact of any heightened risks on liquidation timelines,
disposition proceeds, and the quantitative analysis;
(4) Credit enhancement available to the notes, as over-collateralization
in the form of vehicles and as measured by the net book value of the vehicle
fleet;
(5) Payment disruption risks and the sufficiency of funds available under
the letters of credit (LOCs) initially sized to cover roughly six months
of trust expenses and interest due on the notes. The Issuer has
drawn on the LOCs to cover note interest payments following Hertz's
missed lease payments;
Our analysis has considered 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. The contraction in economic
activity in the second quarter will be severe and the overall recovery
in the second half of the year is expected to be gradual. However,
there are significant downside risks to Moody's forecasts in the event
that the pandemic is not contained, and lockdowns have to be reinstated.
As a result, the degree of uncertainty around the forecasts is unusually
high. We regard the coronavirus outbreak as a social risk under
its ESG framework, given the substantial implications for public
health and safety.
Below are some of the key assumptions Moody's applied in its quantitative
analysis in various scenarios:
Probability of sponsor default: 100%
Probability of liquidation of fleet following bankruptcy: 100%
Disposal value of the fleet: Moody's assumed the following haircuts
to the last reported net book value (NBV) of the vehicle fleet ($12.2
billion):
Non-Program Haircut upon Sponsor Default: Mean: 30%
- 35%
Non-Program Haircut upon Sponsor Default: Standard Deviation:
6% - 10%
Fixed Program Haircut upon Sponsor Default: 10%
Additional Fixed Non-Program Haircut upon Manufacturer Default:
20%
Non-program Manufacturer Concentration (percentage, number
of manufacturers, assumed rating):
Aa/A Profile: 25%, 2, A3
Baa Profile: 40%, 2, Baa3
Ba/B Profile: 35%, 1, Ba3
Program Manufacturer Concentration (percentage, number of manufacturers,
assumed rating):
Aa/A Profile: 0%, 0, A3
Baa Profile: 70%, 1, Baa3
Ba/B Profile: 30%, 1, Ba3
Correlation: Moody's applied the following correlation assumptions:
Correlation among the sponsor and the vehicle manufacturers: 10%
Correlation among all vehicle manufacturers: 25%
Default risk horizon: Moody's assumed the following default risk
horizon:
Sponsor: 5 years (though 100% probability of default)
Manufacturers: 1 year
A fixed set of time horizon assumptions, regardless of the remaining
term of the transaction, is used when considering sponsor and manufacturer
default probabilities and the expected loss of the related liabilities,
which simplifies Moody's modeling approach using a standard set of benchmark
horizons. Detailed application of the assumptions are provided
in the methodology.
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 outcome of the bankruptcy process is
favorable to Class A noteholders owing to a controlled liquidation of
the vehicles in a sustained liquid market, (2) the credit quality
of the lessee improves, (3) a sustained improvement in the car rental
market results in higher utilization of the vehicle fleet, and (4)
a sustained improvement in the demand for used vehicles results 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 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, (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
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
tab on the issuer/entity page for the respective issuer on www.moodys.com.
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.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
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
office that issued the credit rating is available on www.moodys.com.
REFERENCES/CITATIONS
[1] COVID-19 Valuation Services Update, J.D.
Power, 22-May-2020
[2] Auto Market Update, Moody's Analytics, 13-May-2020
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Arti Mattu
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
