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Announcement:

Moody's places Dollar Thrifty-sponsored rental car asset backed securities on review for possible upgrade

22 Apr 2011

New York, April 22, 2011 -- Moody's has placed on review for possible upgrade two series of rental car asset backed notes issued by Rental Car Finance Corp., a special purpose entity owned by Dollar Thrifty Automotive Group, Inc. (Dollar Thrifty, B2 positive). This is prompted by an upgrade in the corporate rating of the sponsor to B2, outlook positive, from B3, outlook positive, on April 19, 2011.

COMPLETE RATING ACTIONS:

Issuer: Rental Car Finance Corp.

Series Description: Series 2006-1 Rental Car Asset-Backed Notes

Class Description: Class A

Current Rating: Ba1 Placed Under Review for Possible Upgrade; previously on April 29, 2010 upgraded to Ba1

Underlying Rating: Ba1 Placed Under Review for Possible Upgrade; previously on April 29, 2010 upgraded to Ba1

Financial Guarantor: Ambac Assurance Corporation (NR; rating withdrawn on April 7, 2011)

Series Description: Series 2007-1 Rental Car Asset-Backed Notes

Class Description: Class A

Current Rating: Ba2 Placed Under Review for Possible Upgrade; previously on April 29, 2010 upgraded to Ba2

Underlying Rating: Ba2 Placed Under Review for Possible Upgrade; previously on April 29, 2010 upgraded to Ba2

Financial Guarantor: Financial Guaranty Insurance Company (NR; rating withdrawn on March 29, 2009)

The actions are motivated primarily by the strengthening credit profiles of Dollar Thrifty as the sponsor, master servicer and the directly-owned DTG Operations, Inc. as the lessee, as reflected by the upgrade of its rating to B2, positive from B3, positive. The probability of default of the sponsor, while only one of several important variables which drive our ratings of rental car asset-backed securities, is the single most important factor. The principal methodology used in rating the transactions is described below. Other methodologies and factors that may have been considered in the process of rating this issue can also be found in the Research & Ratings directory, in the Rating Methodologies sub-directory on www.moodys.com. In addition, Moody's publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of its website, at www.moodys.com/SFQuickCheck.

Separately, we note that following the termination of Dollar Thrifty's merger agreement with Hertz Global Holdings, Inc. (Hertz) last year after Dollar Thrifty did not obtain the requisite votes to execute its definitive merger agreement with Hertz at the special meeting of shareholders held on September 30, 2010, Dollar Thrifty and Avis Budget have been cooperating to pursue antitrust regulatory clearance of a potential acquisition of Dollar Thrifty's common stock by Avis Budget. Moody's views the potential acquisition as neutral to credit positive to Dollar Thrifty-sponsored ABS. Given the uncertainties concerning the completion of the acquisition, such as the outcome of FTC approval, Moody's will take ratings actions if the transaction comes to fruition, depending on its ultimate impact on the Dollar Thrifty-sponsored ABS.

PRINCIPAL RATING METHODOLOGY

The primary asset backing the notes is the monthly lease payments owed by DTG Operations, Inc., and guaranteed by the sponsor under an operating lease, as well as a pool of vehicles comprising the bulk of the sponsor's daily rental car fleet, including both program vehicles (acquired vehicles subject to repurchase, or guaranteed a minimum depreciation or resale value, by the related auto manufacturer at pre-set prices) and non-program vehicles (acquired vehicles that do not benefit from such repurchase or guaranteed depreciation agreements). The vehicles are owned by a bankruptcy-remote entity, referred to as the lessor, which may also be the issuer or be an affiliate of the issuer. The sponsor and/or operating affiliates act as lessees. For quantitative analysis Moody's uses a monte carlo simulation model which simulates the potential cash flows from the vehicle assets and any additional credit enhancements and the rated obligation repayment requirements.

The key factors in Moody's rating analysis include the probability of default of the sponsor, 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 case the rental car sponsor defaults. Monte Carlo simulation modeling was used to assess the impact on bondholders of these variables. The default probability of the sponsor is simulated based on its current corporate probability of default rating and Moody's idealized default rates. For surveillance purposes, in the event that an upgrade above the initial rating is being considered, we stress the rating of the sponsor as lessee to provide a limited degree of de-linkage of the rated ABS from the corporate rating of the sponsor, otherwise, the current rating of the sponsor is used.

All of the sponsoring rental car companies fleets include both program vehicles and non-program vehicles (also known as 'risk' vehicles). Under the terms of the simulation, in cases where the related sponsor does not default it is assumed that bondholders are repaid in full and no liquidation of the lessor's rental car fleet is necessary. In cases where the sponsor does default, the lessor's fleet must be liquidated in order to repay their secured loans to the Issuer, and ultimately the bondholders. In those cases, the default probability of the related manufacturers must also be simulated. Due to Chrysler's, Ford's and GM's high concentrations in the pool and non-investment grade ratings or non-ratings, as applicable, their defaults were simulated based on estimates for probability of default provided by Moody's corporate analysts. These default estimates differentiate between default with continued operation and default with cessation of operations. The default probability of the 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 that obligation.

In simulating liquidation of the rental car fleet following a sponsor 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 (risk) fleet, as well as the portion of the program 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 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. However, in the case of rental car ABS sponsored by Avis Budget, we assume the discount for non-program (risk) vehicles is 15% to reflect both the terms required under the transaction documentation and historic performance. 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 sponsor'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%).

With respect to transaction maturity, for analytical purposes Moody's is assigning each transaction to one of three assumed maturity buckets based on its actual remaining expected maturity. If the remaining expected maturity is less than 18 months, a remaining maturity of 12 months will be assumed. If the remaining expected maturity is 18 months or more but less than 37 months, 24 months will the input to the model. If the remaining expected maturity is 37 months or more, 60 months will be assumed. This is a method of quantifying our view that there is greater uncertainty regarding fleet mix by manufacturer for transactions with longer terms than for those with shorter terms.

Moody's Investors Service did not receive or take into account a third party due diligence report on the underlying assets or financial instruments related to the monitoring of this transaction in the past six months.

ADDITIONAL RESEARCH

Reports for the above transactions and other transactions and 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 available on moodys.com.

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 places Dollar Thrifty-sponsored rental car asset backed securities on review for possible upgrade
No Related Data.
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