Fitch to Rate Hertz Vehicle Financing II LP, Series 2016-3 and 2016-4; Issues Presale

NEW YORK--()--Fitch Ratings expects to assign the following ratings and Rating Outlooks to the series 2016-3 and 2016-4 notes issued by Hertz Vehicle Financing II LP (HVF II):

Series 2016-3

--$TBD class A notes 'AAAsf'; Outlook Stable;

--$TBD class B notes 'Asf'; Outlook Stable;

--$TBD class C notes 'BBBsf'; Outlook Stable;

--$TBD class D notes 'BBsf'; Outlook Stable.

Series 2016-4

--$TBD class A notes 'AAAsf'; Outlook Stable;

--$TBD class B notes 'Asf'; Outlook Stable;

--$TBD class C notes 'BBBsf'; Outlook Stable;

--$TBD class D notes 'BBsf'; Outlook Stable.

Please note that the principal amounts are yet to be determined for both series. Final sizing will reflect market demand.

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 and DTAG's rental fleets. Concentration limits, based on a number of characteristics, are present to help mitigate the risk of individual OEM bankruptcies or failure to honor repurchase agreement obligations.

OEM Financial Stability: OEMs with program vehicle concentrations in HVF II have all improved their financial position in recent years and have positioned themselves well to meet their respective repurchase agreement obligations. Fitch affirmed the Issuer Default Rating (IDR) of Fiat Chrysler Automobiles NV (FCA), largest OEM in HVF II, at 'BB-' in October 2015 and recently upgraded the IDR of GM (third-largest) to 'BBB?' in June 2015.

Consistent Performance: Hertz's historical vehicle fleet depreciation has been relatively stable, despite recent increases in 2014?2015 for non-program vehicles due to higher aging within the fleet. Historical vehicle disposition losses have been minimal for PV, and NPV have recorded mostly gains. However, dispositions are expected to come under pressure over the next two to three years 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 (EL) levels for all classes under the requested ratings.

Structural Features Mitigate Risk: Vehicle market value/disposition proceeds 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 conditions, resulting in low historical fleet disposition losses and stable depreciation rates.

Adequate Fleet Servicer and Fleet Management: Hertz is deemed an adequate servicer and administrator, as evidenced by its historical fleet management and securitization performance to date. Fiserv is the backup disposition agent, and 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 scenario 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 exceeded the expected loss from the sensitivity. Sensitivity scenarios were run on the 2016-4 five-year maturity structure, as this series has a slightly higher interest expense cost, and therefore, a slightly higher EL level than 2016-3.

For all sensitivity scenarios, the class A notes show no sensitivity to any of the above scenarios. 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 2016-3 and 2016-4 -- 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.

Hertz Vehicle Financing II LP, Series 2016-3 and 2016-4 (US ABS)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881937

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 2016-3 and 2016-4 Appendix

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881991

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005080

ABS Due Diligence Form 15E 1

https://www.fitchratings.com/creditdesk/press_releases/content/ridf15E_frame.cfm?pr_id=1005080&flm_nm=15e_1005080_1.pdf

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005080

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Timothy McNally
Associate Director
+1 212-908-0870
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Hylton Heard
Senior Director
+1 212-908-0214
or
Committee Chairperson
Kevin Corrigan
Senior Director
+1 212-908-0156
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Timothy McNally
Associate Director
+1 212-908-0870
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Hylton Heard
Senior Director
+1 212-908-0214
or
Committee Chairperson
Kevin Corrigan
Senior Director
+1 212-908-0156
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com