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Rating Action:

Moody's lowers Hertz rating to B1/Negative

14 Jul 2009

Approximately $4 Billion of Debt Securities Affected.

New York, July 14, 2009 -- Moody's Investors Service lowered the Hertz Corporation's Corporate Family Rating (CFR) and Probability of Default to B1 from Ba3, and its Speculative Grade Liquidity Rating to SGL-3 from SGL-2. The downgrades reflect Moody's expectation that weakness in automobile and equipment rental demand will persist into 2010, and that the company's cost of refinancing its considerable amount of maturing debt will be high. As a result, credit metrics will remain below expected levels until there is a more robust and sustained recovery in demand, which we do not anticipate will occur until 2011. This extended decline in Hertz's debt protection measures will occur despite a number of positive considerations. These include: the sizable reduction in Hertz's debt that resulted from its rental-car defleeting initiatives; the progress the company continues to make in fixed and overhead costs; the recovery in the used car market; and, the successful emergence of General Motors and Chrysler from bankruptcy without any disruption to the car rental sector. The negative outlook and SGL-3 rating recognize that during the coming 18 months Hertz will have to refinance approximately $4.2 billion in debt that supports its car rental fleet.

The global economic downturn is depressing demand in almost all of Hertz's markets: leisure and commercial on-airport car rentals in the US; domestic equipment rentals that remain tied to the commercial and residential construction sectors; and, on-airport car rental demand in Europe. This downturn has had a significantly negative impact on the company's credit metrics with EBITA/interest for the LTM through March 2009 of only 0.9 times. Moreover, Hertz expects that the downturn will result in revenues falling to about $6.8 billion during 2009, a decline of $1.7 billion (20%) from 2008's level. In response, it has significantly reduced the size of its car rental fleet and thereby generated sufficient cash to reduce debt by almost $3 billion since 2007. It has also made consistent progress in achieving its goal of reducing fixed costs between 2007 and 2010 by $1.2 billion. The company estimates that it will have achieved cumulative savings of $1.1 billion by year-end 2009 with $570 million generated this year. Notwithstanding the magnitude of these cost and capital structure improvements, they will not fully offset the severe and rapid decline in revenues. Moreover, the recovery in revenues during 2010 could be modest. Consequently, the company's intermediate-term credit metrics will be more in keeping with the B1 level.

Further stress on Hertz's credit metrics will result from the higher interest costs that the company will incur as it refinances the $4.2 billion in maturing fleet debt. Hertz estimates that it could incur as much as $150 million in additional interest expense due to higher rates.

The key components of Hertz's current liquidity position includes $557 million in unrestricted cash, availability under an unused $1.2 billion credit facility maturing in 2012, approximately $1.0 billion in excess capacity under its fleet debt facilities that are available through late 2010, and considerable free cash flow from fleet reduction initiatives. These sources should provide adequate coverage of maturing obligations during the twelve months through the 2nd quarter of 2010; these debt maturities amount to approximately $1.2 billion. However, beyond the 2nd quarter Hertz's liquidity profile could become stressed. During the 3rd quarter of 2010 a further $1.3 billion in securitizations mature, and during the 4th quarter an additional $2.2 billion in fleet debt comes due.

Hertz has a publicly stated plan for refinancing these maturing obligations. The plan includes: efforts to obtain $1.25 billion in US conduit facilities during the very near term; issuance of as much as $900 million in TALF securitizations by the end of the year; and renegotiation of $1 billion in European conduit facilities. Near-term progress in implementing this refunding plan will be critical in limiting further downward pressure on the rating. Moody's notes the company's successful issuance of $544 million of common equity and $475 million of convertible notes during May, and the moderate improvement during recent months in market conditions for unsecured debt and ABS transactions are positive indications of Hertz's ability to make progress under its plan.

The key near-term driver of Hertz's rating and outlook will be its ability to implement its funding program. Lack of material progress could contribute to a downgrade. Conversely, a stabilization of the outlook would be supported by solid progress in implementing major elements of the plan through the balance of the year, clear signs of stability in the ABS market, and successful implementation of Hertz's cost cutting program.

Operationally, sustaining the B1 rating would depend on Hertz's ability to remain on track for generating EBITA/total interest exceeding 1.2 times for 2009, compared with approximately 1.0 times for 2008. Debt/EBITDA should remain under 4.0 times for 2009 and under 3.5 times for 2010.

Ratings Changed:

The Hertz Corporation:

Corporate Family Rating: to B1 from Ba3

Probability of Default: to B1 from Ba3

Senior unsecured: to B2 (LGD4, 64%) from B1 (LGD4, 61%)

Subordinate: to B3 (LGD6, 92%) from B2 (LGD6, 90%)

Speculative Grade Liquidity Rating: to SGL-3 from SGL-2

The Old Hertz Corporation:

Notes: to B3 (LGD6, 92%) from B2 (LGD6, 90%)

Ratings Unchanged

The Hertz Corporation

Secured term loan: Ba1 (LGD2, 19%)

The last rating action on Hertz was the withdrawal of the Ba1 rating of The Hertz Corporation's $1.6 billion senior secured credit facility due 2010 on June 4, 2007.

The principal methodology used in rating Hertz was the Global Equipment and Automobile Rental Methodology, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's lowers Hertz rating to B1/Negative
No Related Data.
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