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Rating Action:

Moody's raises Avis' Corporate Family Rating to B1.

06 Apr 2011

New York, April 06, 2011 -- Moody's Investors Service raised the following ratings of Avis Budget Group, Inc.: Corporate Family Rating (CFR) and Probability of Default Rating (PDR) to B1 from B2, senior unsecured to B2 from B3, and senior secured to Ba1 from Ba2. Moody's also assigned a Ba1 rating to Avis' proposed $1.25 billion secured credit facility that will replace an existing $1.175 billion secured credit facility with maturities in 2011 and 2013. The company's Speculative Grade Liquidity rating remains SGL-3 and the rating outlook is stable.

RATINGS RATIONALE

The upgrade reflects the improved operating fundamentals in the domestic car rental sector and Avis' ongoing efforts to lower costs and expand profit margins. As a result, Avis should be able to achieve further improvement in its credit metrics. An additional consideration in the upgrade is Moody's expectation that if Avis is successful in its attempt to acquire Dollar Thrifty Automotive Group (B3/positive), the transaction will be consummated on terms that are largely consistent with its current offer.

The domestic car rental industry is benefiting from several factors. First, the major players in the sector are maintaining a disciplined approach toward vehicle purchases and are focusing on keeping overall fleet size in line with demand. Second, car rental companies are also placing greater emphasis on improving profitability and return measures though lowering costs and growing ancillary revenues, rather than attempting to gain share through price reductions. Finally, used car prices are expected to remain strong now that domestic auto manufacturers have achieved operating models that are driven by retail demand rather than by the need to cover high fixed costs.

Within this environment Avis has been exceeding our expectations for lowering its costs and expanding profitability. Between 2008 and 2010, the company's operating margin (reflecting Moody's standard adjustments) increased from 10% to 15.7%. We expect that profitability and other key metrics will continue to improve from the levels achieved during 2010. These measures (incorporating Moody's adjustments) include: EBIT/interest of 1.2x; debt/EBITDA of 4.1x; and EBITA/average assets of 5.9%.

Avis' current offer of $58 per share for Dollar represents a purchase price of approximately $1.8 billion. We expect that a large portion of the purchase price will be funded by the cash held by Avis and Dollar, and by a meaningful equity offer by Avis. Our assessment also assumes that assets disposed of by Avis in order to achieve regulatory approval for the transaction would generate revenues that approximate no more than $325 million. These transaction characteristics, combined with Dollar's future earnings prospects and available synergies, should enable Avis (pro forma for the transaction) to maintain credit metrics that are similar to those generated during fiscal 2010.

To the extent that Avis is successful in expanding its margins through cost reductions, there could be further positive movement in the rating if EBIT/interest can be sustained in the area of 2x and debt /EBITDA below 3.5x. An additional critical consideration in any upward movement in Avis' rating will be the company's liquidity profile. Although Avis will maintain a sizable cash position and availability under its revolver, it will remain heavily dependent on continued annual access to the ABS market in order to fund its fleet purchases. This dependence would increase with an acquisition of Dollar. A key consideration in any further upgrade will be Avis' ability to moderate the annual maturities of fleet and corporate debt, and to enhance sources of liquidity in the form of cash on hand and committed multi-year credit facilities.

The rating could come under pressure if Avis were to significantly increase its offer for Dollar, whose current share price is $68. There could also be pressure if EBIT/interest were to remain near 1x or if debt/EBITDA exceeded 4.5x.

The principal methodologies used in this rating were Global Equipment and Automobile Rental Industry published in December 2010, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

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

New York
Michael J. Mulvaney
MD - Corporate Finance
Corporate 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 raises Avis' Corporate Family Rating to B1.
No Related Data.
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