New York, November 24, 2020 -- Moody's Investors Service, ("Moody's") has
upgraded the ratings of 9 notes and confirmed the ratings of 2 notes 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 wholly-owned indirect subsidiary of the
transaction sponsor and single lessee, The Hertz Corporation (Hertz).
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 under a master lease agreement for
use in its rental car business.
Moody's actions on the rental car ABS reflect (1) the significant increase
in the notes' credit enhancement following Hertz's successful
execution, to date, of the July court-approved order
requiring it to meet certain lease payments and vehicle sales targets,
(2) the current and projected strength in the used vehicle market,
supporting Hertz's ongoing liquidation efforts, and (3) Moody's
view that Hertz is likely to continue liquidating the underlying fleet
in 2021 and remitting sales proceeds in a controlled manner while operating
in bankruptcy in order to timely pay down the rated notes, though
relatively higher tail risk exists for the two series maturing in 2021
(Series 2015-3 and 2017-1).
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,
Confirmed at Baa3 (sf); previously on Aug 11, 2020 Baa3 (sf)
Placed Under Review for Possible Upgrade
Issuer: Hertz Vehicle Financing II LP, Series 2016-2
Series 2016-2 Rental Car Asset Backed Notes, Class A,
Upgraded to Baa1 (sf); previously on Aug 11, 2020 Baa3 (sf)
Placed Under Review for Possible Upgrade
Issuer: Hertz Vehicle Financing II LP, Series 2016-4
Series 2016-4 Rental Car Asset Backed Notes, Class A,
Upgraded to Baa1 (sf); previously on Aug 11, 2020 Baa3 (sf)
Placed Under Review for Possible Upgrade
Issuer: Hertz Vehicle Financing II LP, Series 2017-1
Class A Notes, Confirmed at Baa3 (sf); previously on Aug 11,
2020 Baa3 (sf) Placed Under Review for Possible Upgrade
Issuer: Hertz Vehicle Financing II LP, Series 2017-2
Class A Notes, Upgraded to Baa1 (sf); previously on Aug 11,
2020 Baa3 (sf) Placed Under Review for Possible Upgrade
Issuer: Hertz Vehicle Financing II LP, Series 2018-1
Class A Notes, Upgraded to Baa1 (sf); previously on Aug 11,
2020 Baa3 (sf) Placed Under Review for Possible Upgrade
Issuer: Hertz Vehicle Financing II LP, Series 2018-2
Class A Notes, Upgraded to Baa1 (sf); previously on Aug 11,
2020 Baa3 (sf) Placed Under Review for Possible Upgrade
Issuer: Hertz Vehicle Financing II LP, Series 2018-3
Class A Notes, Upgraded to Baa1 (sf); previously on Aug 11,
2020 Baa3 (sf) Placed Under Review for Possible Upgrade
Issuer: Hertz Vehicle Financing II LP, Series 2019-1
Class A Notes, Upgraded to Baa1 (sf); previously on Aug 11,
2020 Baa3 (sf) Placed Under Review for Possible Upgrade
Issuer: Hertz Vehicle Financing II LP, Series 2019-2
Class A Notes, Upgraded to Baa1 (sf); previously on Aug 11,
2020 Baa3 (sf) Placed Under Review for Possible Upgrade
Issuer: Hertz Vehicle Financing II LP, Series 2019-3
Class A Notes, Upgraded to Baa1 (sf); previously on Aug 11,
2020 Baa3 (sf) Placed Under Review for Possible Upgrade
RATINGS RATIONALE
Today's action resolves the review of the 11 tranches of rental
car ABS issued by Hertz Vehicle Financing II LP (HVF II, or the
issuer) placed under review for possible upgrade on August 11, 2020.
Moody's actions on the rental car ABS reflect (1) the significant increase
in average credit enhancement, from 36.9% as of July
2020 to 53.5% as of September 2020, following Hertz's
successful execution thus far of the July court-approved order
requiring it to make certain lease payments, dispose of a minimum
number of vehicles and remit minimum sales proceeds to pay down the rated
notes, (2) the current strong used vehicle prices and sales volumes
and the stable projected market in the near future, and (3) Moody's
view that Hertz is likely to continue liquidating the underlying fleet
in 2021 and remitting vehicle sales proceeds in a controlled manner while
operating in bankruptcy in order to timely pay down the rated notes,
though relatively higher tail risk exists for the two series with legal
final maturities in September and October 2021.
To date, Hertz has successfully executed the July court-approved
order, which increased credit enhancement significantly.
Between June and September, Hertz has sold 177,140 vehicles
(roughly 36% of the fleet size in May), raised approximately
$3.97 billion in vehicle sales proceeds and made $325
million in lease payments, the proceeds of which have been used
to pay down the Class A notes pro rata and full turbo. As of September,
and on average, the Class A notes were paid down to 39% of
their original balance and had 53.5% of available credit
enhancement, providing a strong cushion against any vehicle market
value declines or any credit enhancement erosion attributed to vehicle
depreciation that should remain uncovered by any lease payments.
Although Hertz and the ABS investors have yet to reach an agreement regarding
the pace of vehicle sales and lease payments beyond December, Moody's
considers that Hertz is likely to continue liquidating the underlying
fleet and remitting vehicle sales proceeds in a controlled manner while
operating in bankruptcy in 2021. Due to their relatively greater
tail risk, Moody's has positioned the ratings of the notes
maturing in September and October 2021 lower than those maturing beyond
2021. Moody's believes there is a high likelihood that the
notes maturing in 2021 will be fully repaid by their legal final maturities
using a combination of any ongoing lease payments and/or vehicle sales
proceeds.
In its Form 8K filing dated October 16, 2020, Hertz projected
that it would continue to make monthly lease payments in 2021 equivalent
to 2% of its outstanding ABS collateral's net book value
(NBV). The company also projected its fleet utilization rate to
be above 65% by year-end (up from a low of 23% following
the pandemic) and above 75% by the end of 2021 (near the steady-state,
pre-COVID-19 utilization rate of 80%). Hertz
will likely continue to defleet the existing master trust as it refreshes
its aging fleet using external sources of financing.
In taking today's actions, Moody's also considered that
performance uncertainty remains, particularly for the notes maturing
in 2021, as the timing of Hertz emerging from bankruptcy and the
outcome is still uncertain. Moody's also considered the available
liquidity to pay note interest. Moody's estimates that the
current amount available under the letters of credit (LOCs) is enough
to cover interest on the notes for 3 to 6 months beyond December.
In addition, principal collections can be used to cover any interest
shortfalls once the LOCs are exhausted, partly mitigating the liquidity
risk.
The used vehicle market remains robust, supporting Hertz's ongoing
liquidation process and sales prices. Used vehicle sales volumes
and pricing began to improve in late April and increased drastically in
May through Mid-August, enabling rental car companies to
de-fleet at prices higher than those prior to the pandemic.
Continued pent-up demand, the tight supply of new vehicles
and the avoidance of mass transit have bolstered the demand for used vehicles
and their prices. Moody's Analytics estimates that used car
prices will increase by about 18% in 2020 and by 3% in 2021[1].
Used vehicle prices are expected to stabilize in 2021 as supply and demand
find equilibrium. Historically, used car prices have risen
when unemployment rates are high and consumers tend to switch to used
vehicles, which are more affordable than new ones.
The car rental sector is projected to remain below pre-COVID level
in the next 12-18 months. While conditions in the used car
market are presently constructive, passenger air travel volume is
expected to be low and not fully recovered until 2023.
The coronavirus outbreak, the government measures put in place to
contain it, and the weak global economic outlook continue to disrupt
economies and credit markets across sectors and regions. Our analysis
has considered the effect on the performance of corporate assets from
the current weak US economic activity and a gradual recovery for the coming
months. Although an economic recovery is underway, it is
tenuous, and its continuation will be closely tied to containment
of the virus. As a result, the degree of uncertainty around
our forecasts is unusually high.
We regard the coronavirus outbreak as a social risk under our 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 ($6.4
billion):
Non-Program Haircut upon Sponsor Default: Mean: 40%
(considers vehicle depreciation over a potentially extended liquidation
timeline as well as market value price decline upon vehicle liquidation)
Non-Program Haircut upon Sponsor Default: Standard Deviation:
6%
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 July 2020
and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1232483.
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 ultimate outcome of the bankruptcy process
is favorable to the Class A noteholders owing to a controlled liquidation
of the vehicles in a sustained liquid market, resulting in a meaningful
increase in credit enhancement supporting the Class A notes, and
in the case of the notes maturing in 2021, meaningfully lower tail
risk, (2) sustained improvement in the car rental market resulting
in higher utilization of the vehicle fleet coupled with Hertz's
acceptance of the lease in bankruptcy and an improvement in the lessee's
credit quality, and (3) sustained improvement in the demand for
used vehicles resulting 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 ultimate 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, resulting in a meaningful
decrease in credit enhancement supporting the Class A notes, (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] Auto Finance -- United States: Outlook changes to
stable as signs of recovery improve auto sector prospects, Moody's
Investors Service, 18 November 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.
Chloe Zhang
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.
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U.S.A.
JOURNALISTS: 1 212 553 0376
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