NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned the following ratings and Outlooks to the series 2016-1 and 2016-2 notes issued by Hertz Vehicle Financing II LP (HVF II):
Series 2016-1
--$332,902,000 class A notes 'AAAsf'; Outlook Stable;
--$81,187,000 class B notes 'Asf'; Outlook Stable;
--$25,152,000 class C notes 'BBBsf'; Outlook Stable;
--$26,549,000 class D notes 'BBsf'; Outlook Stable.
Series 2016-2
--$425,000,000 class A notes 'AAAsf'; Outlook Stable;
--$103,648,000 class B notes 'Asf'; Outlook Stable;
--$32,111,000 class C notes 'BBBsf'; Outlook Stable;
--$33,894,000 class D notes 'BBsf'; Outlook Stable.
KEY RATING DRIVERS
Diverse Vehicle Fleet: HVF II is deemed diverse under the criteria due to the high degree of manufacturer, model, segment, and geographic diversification in Hertz's rental fleet.
Concentration limits, based on a number of fleet characteristics, are present to help mitigate the risk of individual manufacturer defaults and losses.
OEM Financial Stability: OEMs with PV concentrations in the trust have all improved their financial position in recent years and have positioned themselves well to meet their respective repurchase agreement obligations. Fitch upgraded GM, the largest concentration in HVF II, to investment grade ('BBB') in June 2015.
Consistent Performance: Hertz's historical vehicle fleet depreciation has been relatively stable, despite recent increases in 2014 and 2015 for NPV vehicles due to higher aging of the fleet. Historical vehicle disposition losses have been minimal for PV and have recorded mostly gains for NPV, though dispositions are expected to come under pressure from the increasing vehicle supply in the U.S. wholesale market.
Enhancement Covers Fitch's Expected Loss: Initial credit enhancement (CE) for the notes is dynamic and based on the HVF II fleet mix, with maximum and minimum levels. The dynamic CE levels proposed for all class of notes of each series covers Fitch's maximum and minimum expected loss levels for all classes under the requested ratings.
Structural Features Mitigate Risk: Vehicle market value tests, amortization triggers, and events of default all mitigate risks stemming from ongoing vehicle value volatility and weakness, ensuring parity between asset values and ongoing market values resulting in low historical fleet disposition losses and stable depreciation rates.
Adequate Fleet Servicer and Fleet Management: Hertz is deemed as adequate servicer and administrator for the master trust as evidenced by its fleet management abilities and securitization performance to date. Fiserv is the backup disposition agent, while Lord Securities the backup administrator.
Legal Structure Integrity: The legal structure of the transaction provides that a bankruptcy of Hertz would not impair the timeliness of payments on the securities.
RATING SENSITIVITIES
Fitch's rating sensitivity analysis focuses on two scenarios involving potentially extreme market disruptions that would force the agency to redefine its stress assumptions. The first examines the effect of moving Fitch's bankruptcy/liquidation timing scenario to eight months at 'AAAsf' with subsequent increases to each rating level. The second considers the effect of moving the disposition stresses to the higher end of the range at each rating level for a diverse fleet. For example, at 'AAAsf', the stress would move from 24% to 28%. Finally, the last example shows the impact of both stresses on the structure. The purpose of these stresses is to demonstrate the potential rating impact on a transaction if one or a combination of these scenarios occurs.
Fitch determined ratings by applying expected loss levels for various rating categories until the enhancement proposed exceed the expected loss from the sensitivity.
Sensitivity scenarios were run on the 2016-2 five-year maturity structure, as this series has a slightly higher interest expense cost and therefore, a slightly higher EL level than 2016-1. For all sensitivity scenarios, the notes show little sensitivity to the class A notes under each of the scenarios with downgrades occurring under the combined scenario only. One notch to one level downgrades would occur to the subordinate notes under each scenario with greater sensitivity to the disposition stress scenario. Under the combined scenario, the subordinate notes would be placed under greater stress.
DUE DILIGENCE USAGE
Fitch was provided with third-party due diligence information from PricewaterhouseCoopers LLP (PwC). The third-party due diligence focused on a review of the procedures and related data for approximately 59 vehicles in the pool for each series, including the following areas:
--Title, Lien and OEM;
--Capital Costs;
--Mark-to-Market and Disposition Proceeds.
Fitch considered this information in its analysis, but the findings had no impact on the recommended ratings. A copy of the ABS Due Diligence Form-15E received by Fitch in connection with this transaction may be obtained through the link at the bottom of this rating action commentary.
Fitch's analysis of the Representations and Warranties (R&W) of this transaction can be found in the reports titled 'Hertz Vehicle Financing II LP, Series 2016-1 and 2016-2 -- Appendix'. These R&W are compared to those of typical R&W for the asset class as detailed in the special report 'Representations, Warranties, and Enforcement Mechanisms in Global Structured Finance Transactions' dated June 12, 2015.
Additional information is available at www.fitchratings.com.
Applicable Criteria
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158
Criteria for Servicing Continuity Risk in Structured Finance (pub. 17 Dec 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875586
Global Rating Criteria for Rental Fleet ABS (pub. 08 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870244
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952
Related Research
Hertz Vehicle Financing II LP, Series 2016-1 and 2016-2 -- Appendix
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=877041
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=999418
ABS Due Diligence Form 15E 1
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999418
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.