CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) and debt ratings of Avis Budget Group, Inc. (ABG) and its various Fitch-rated subsidiaries following the completion of its car rental and fleet leasing peer review. The Rating Outlook is Stable. A full list of rating actions is at the end of this release.
The outlook for car rental companies remains Stable. Operating performance is expected to remain stable in the near to medium term. Liquidity remains strong given good capital markets access and stable operating cash flow generation. The near-term potential impact of rising interest rates is expected to be modest, as increased funding costs can be sufficiently passed to customers. Cash flow and operating leverage is also expected to remain relatively stable, as earnings growth is expected to offset increased funding needs for capital spending on fleet replacement or for acquisitive growth.
The car rental industry has consolidated considerably, resulting in the top three rental car companies representing approximately 95% of the U.S. rental car market, according to Auto Rental News' Fact Book 2013. As a result, competition remains intense, as the major players seek to increase market share and improve operating margins. Fitch expects the car rental companies will seek to drive profitability and margins through optimizing efficiency and improving operational leverage.
The buildup of risk vehicle fleets by rental car companies largely reflects the continued strength in wholesale used vehicle prices, which peaked in 2011. A healthy used vehicle market allowed car rental companies to extend the service lives of its fleet while still realizing sufficient gains on sales at the time of disposition. Rental car companies have the flexibility to alter the mix of its risk vehicles, depending on market conditions, which also include manufacturer incentives and discount pricing opportunities. Fitch believes risk vehicles will likely comprise a large, but declining share of the rental car fleet over the near term, as wholesale used vehicle prices are expected to moderate over the next two years.
KEY RATING DRIVERS - IDRs and SENIOR DEBT
ABG's ratings are supported by the strength of its brand and franchise, its leading position in the on-airport rental market and its record operating results in 2013. ABG's liquidity profile is strong given its increased corporate EBITDA and operating cash flow generation, as well as its consistent access to the capital markets. The ratings also factor the cyclical nature and the susceptibility of the business to the overall economy and to potential slowdowns in travel volumes. While ABG remains susceptible to pricing pressures and passenger volumes in air travel, Fitch believes the company is better positioned since the crisis to manage cyclical downturns and maintain positive earnings due to improvements in revenue and supplier diversity, operating leverage, and liquidity and funding, though Fitch believes the company remains somewhat reliance on secured funding sources.
The Stable Outlook reflects Fitch's expectation for continued access to the capital markets through various market cycles, the ability to sustain core operating cash flow generation, strong liquidity and earnings growth in 2014, supported by incremental corporate EBITDA generation and improved operating leverage.
ABG reported record revenues and the second highest level of adjusted EBITDA in 2013, resulting from increased volume, revenue contributions from Zipcar and Payless, and improved operating leverage. For 2014, the company is projecting top line revenue growth of 6% and adjusted EBITDA growth of 12% compared to 2013. ABG expects to drive revenue growth through increased volume and improved pricing and to leverage its brands appropriately. Adjusted EBITDA is expected to benefit from additional cost synergies achieved through improving operating efficiencies through its restructuring and integration efforts. Fitch believes that given ABG's prior record of integrating its businesses and realizing its financial targets, these goals are achievable.
Fitch believes ABG's liquidity profile is strong given its operating cash flow generation and consistent capital markets access over the last several years. At year-end 2013, ABG had $693 million of unrestricted cash, $3.5 billion of availability under its vehicle-backed facilities and $1.1 billion of availability under its revolving credit facility. The company's funding profile remains primarily based on secured corporate debt and securitizations, which is viewed by Fitch to be a rating constraint. As of Dec. 31, 2013, secured debt represented approximately 78% of total long-term debt. Fitch would view an increase in unsecured debt in ABG's funding mix positively, as it would add additional flexibility to the company's overall funding profile.
Corporate leverage, as a function of corporate debt to adjusted EBITDA was 4.4x as of Dec. 31, 2013, which is modestly higher than 2012 due to the $685 million of corporate debt raised to acquire Zipcar during the first-quarter of 2013. ABG manages its leverage from a corporate leverage standpoint, net of unrestricted cash. Net corporate leverage was 3.5x as of year-end 2013, compared with 2.8x one-year prior, which was the lowest level in years, bolstered incremental earnings and lower corporate debt balances through deleveraging and within the company's articulated target of between 3x and 4x. Fitch would view further improvements in ABG's corporate leverage favorably and could generate positive rating momentum in the longer term.
RATING SENSITIVITIES - IDRS, SENIOR DEBT
Fitch believes that positive ratings momentum is limited in the near term, although over the longer term, ratings may be positively influenced by sustained improvements in leverage and liquidity, maintaining appropriate capitalization, and economic access to the capital markets. Additionally, ABG's ability to realize operating synergies from its recent acquisitions and successfully leverage its brands into stronger earnings performance over time would also be viewed positively by Fitch.
Conversely, negative rating actions would be driven by material deterioration in revenue and cash flow generation resulting from a decline in passenger volumes, rental rates and used car values, which would impair ABG's access to funding, liquidity, and/or capitalization. Leverage remaining at materially higher levels, reduced commitment by management to reduce leverage, or an inability to generate incremental revenues from acquisitions could also yield negative rating actions.
SUBSIDIARY AND AFFILIATED COMPANY RATING DRIVERS AND SENSITIVITIES
Avis Budget Finance PLC and Avis Budget Car Rental LLC are wholly-owned subsidiaries of ABG. The ratings are aligned with that of ABG because of the unconditional guarantee provided by ABG and its various subsidiaries. Therefore, the ratings are sensitive to the same factors that might drive a change in ABG's IDR.
Fitch has affirmed the following ratings:
Avis Budget Group, Inc.
--Long-term IDR at 'BB-'.
Avis Budget Car Rental, LLC
--Long-term IDR at 'BB-';
--Senior secured term loan at 'BBB-';
--Revolving credit facility at 'BBB-';
--Senior unsecured debt at 'BB-'.
Avis Budget Finance PLC
--Long-term IDR at 'BB-';
--Senior unsecured debt at 'BB-'
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The issuer did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--Global Financial Institutions Rating Criteria (Jan. 31, 2014);
--Finance and Leasing Companies Criteria (Dec. 11, 2012).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Finance and Leasing Companies Criteria