Rating U.S. Rental Car Securitizations

Rating U.S. Rental Car Securitizations
february 2015
Mike Babick
Senior Vice President, US ABS
Global Structured Finance
Tel. +1 212 806 3229
[email protected]
Kathleen Tillwitz
Managing Director, US & EU Operational Risk
Global Structured Finance
Tel. +1 212 806 3265
[email protected]
Chris O’Connell
Senior Vice President, US ABS
Global Structured Finance
Tel. +1 212 806 3253
[email protected]
Claire Mezzanotte
Group Managing Director
Global Structured Finance
Tel. +1 212 806 3272
[email protected]
Chuck Weilamann
Managing Director, US ABS
Global Structured Finance
Tel. +1 212 806 3226
[email protected]
Related Research
• Legal Criteria for U.S. Structured Finance (July 2014)
• Operational Risk Assessment for U.S. ABS Servicers (December 2014)
• Operational Risk Assessment for U.S. ABS Originators (December 2014)
• Unified Interest Rate Model for Rating U.S. Rental Car Securitizations (February 2015)
• DBRS Master U.S. ABS Surveillance Methodology (October 2014)
• Rating U.S. Structured Finance Transactions Backed by Direct Pay Letters of Credit (May 2012)
DBRS is a full-service credit rating agency
established in 1976. Privately owned and operated
without affiliation to any financial institution,
DBRS is respected for its independent, third-party
evaluations of corporate and government issues,
spanning North America, Europe and Asia.
DBRS’s extensive coverage of securitizations
and structured finance transactions solidifies our
standing as a leading provider of comprehensive,
in-depth credit analysis.
All DBRS ratings and research are available in
hard-copy format and electronically on Bloomberg
and at DBRS.com, our lead delivery tool for
organized, Web-based, up-to-the-minute information. We remain committed to continuously
refining our expertise in the analysis of credit
quality and are dedicated to maintaining
objective and credible opinions within the global
financial marketplace.
Rating U.S. Rental Car Securitizations
February 2015
Rating U.S. Rental Car Securitizations
Scope And Limitations
Introduction / Industry Overview
Bankruptcies Of Anc Rental Corporation And Budget
Rental Car Company Ownership And Industry Consolidation
Key Variables Impacting Rental Car Abs Transactions
Rental Car Company
Auto Manufacturer Credit Quality
Residual Values Of The Vehicles In The Fleet
Transaction Structures
Type Of Transaction
Bankruptcy-Remote Special-Purpose Entity
Lease Payments With Rental Company
Manufacuturer Agreements And Risk Vehicles
Credit Enhancement 12
Interest Rate Hedging
Payments Terms Under Repurchase Agreements – Receivables From Manufacturers
Rental Car ABS Transaction Features
Borrowing Base 13
Transaction Triggers
Operational Risk Review – Originator And Servicer
Fleet Assets
Manufacturer Risk
Manufacturer Eligibility 17
Historical Fleet Performance 17
Liquidation Analysis And Credit Enhancement
Holding Period – Investment Grade Program Vehicles
Bankruptcy Stay Period
Liquidation Period Following Stay
Residual Values During A Liquidation
Transaction Funding Costs And Expenses.
Credit Enhancement 20
Legal Considerations
Rating U.S. Rental Car Securitizations
February 2015
Scope and Limitations
DBRS evaluates both qualitative and quantitative factors when assigning ratings to U.S. rental car securitizations. This methodology represents the current DBRS approach for rating securitizations backed by
U.S. rental cars, related lease contracts as well as other related assets and proceeds thereof. It describes
the DBRS approach to analysis, which includes (i) a focus on the quality of the sponsor/manager, (ii)
evaluation of the servicing capabilities and fleet composition and (iii) utilization of historically employed
liquidation evaluation techniques. This report also outlines the asset class and discusses the methods
DBRS typically employs when assessing a transaction and assigning a rating. It is important to note
that the methods described herein may not be applicable in all cases. Further, this methodology is meant
to provide guidance regarding the DBRS methods used in the sector and should not be interpreted as
prescribing a rigid template, but understood in the context of the dynamic environment in which it is
intended to be applied.
Executive Summary
This report outlines the typical DBRS approach for rating U.S. rental car asset-backed security (ABS)
transactions. DBRS analyzes both qualitative and quantitative factors when rating U.S. rental car ABS
transactions which include an assessment of the quality of the rental car operator and its ability to
adequately track and maintain the fleet of vehicles supporting the transactions as well as an analysis of
the purchase agreements in place with manufacturers and the exposure to the manufacturers through
repurchase obligations under these contracts.
The key analytical considerations typically evaluated include the following:
• Quality of management and financial condition.
• Operational and servicing capabilities.
• Fleet composition and purchase agreements.
• Capital structure, proposed ratings and credit enhancement.
• Liquidation analysis.
• Legal structure and opinions.
DBRS reviews the potential for repayment of the transaction under the terms of the proposed financial
structure. A component of the analysis is that the lessee (rental car company) becomes insolvent and
the vehicles are subsequently liquidated to repay noteholders. Key factors considered in the liquidation
analysis include the credit quality of the auto manufacturers for vehicles subject to repurchase agreements
and timing considerations associated with gaining access to and disposing of vehicles following a bankruptcy of the rental car company.
Rating U.S. Rental Car Securitizations
February 2015
Introduction / Industry Overview
Historically, the rental car industry can generally be divided into two main segments: the on-airport
segment and the local rental segment. The on-airport segment of the industry caters to both business
and leisure customers and is largely driven by airline passenger traffic, or enplanements. The local rental
segment serves some commercial customers but focuses more on leisure and insurance replacement customers. A recent development in the local rental segment is the advent of companies that specialize in car
sharing. The car-sharing business model typically includes a company locating vehicles in cities, airports
or neighborhoods with customers able to rent cars by the hour or by the day by reserving cars online or
through their smartphones. Customers can then use various forms of technology to determine vehicle
availability and subsequently reserve these vehicles for use on an hourly or daily basis.
Another more recent trend in the business is companies looking to become full-spectrum rental car companies with distinctive brands that appeal to the premium, mid-tier and value segments of the market.
For example, Avis Budget Group Inc. (Avis Budget) operates with Avis Rent a Car System (Avis) as its
premium brand, Budget Rent a Car covering the mid-tier portion of the market and Payless Car Rental
in the value sector. Comparable brands for Hertz Global Holdings Inc. (Hertz Global) are the Hertz
Corporation (Hertz) brand in the premium segment, Dollar Rent A Car (Dollar) and Thrifty Car Rental
(Thrifty) in the mid-tier sector and Firefly Car Rental in the value sector.
The chart below (Chart 1) shows recent revenue and fleet trends for the U.S. car rental industry. Beginning
in 2003, the industry began to recover from the effects of the decline in air travel and corresponding drop
in rental car demand following the September 11, 2001 (9/11) terrorist attacks. Since that time, industry
revenue and fleet size increased steadily until the effects of the recent economic downturn affected the
industry in 2007 and 2008. Despite the continued challenging economic conditions that have persisted
since 2009, the industry recovered well with overall revenue increasing nearly 25% between 2009 and
2013, facilitated by industry consolidation and favorable pricing trends.
Chart 1: U.S. Car Rental Revenue vs. Fleet Size
Revenue (billions)
Units (thousands)
Average Fleet
Source: Auto Rental News.
Rating U.S. Rental Car Securitizations
February 2015
Industry turbulence stemming from the drastic decline in enplanements after the events of 9/11 affected
the financial condition of several rental car companies and, in November 2001, ANC Rental Corporation
(ANC), then owner of Alamo and National brands, filed for bankruptcy under Chapter 11 of the U.S.
Bankruptcy Code. In July 2002, Budget Group (Budget) also filed for Chapter 11 bankruptcy protection
after it was unsuccessful in restructuring its balance sheet pre-petition.
The occurrence of these bankruptcies was particularly significant to the structured finance markets as
both rental car companies had several classes of outstanding rental car ABS at the time of their filings.
In the case of ANC, most of its outstanding ABS transactions were funded through ARG Funding
Corporation (ARG). Following the ANC bankruptcy filing, ANC made no lease payments during the
automatic 60-day stay period. As a result, reserve accounts were drawn upon to make interest payments
on the ARG debt. Principal payments scheduled to begin during this time frame were also not made;
however, lease payments did resume after this 60-day period as the bankruptcy court affirmed the contracts. The bankruptcy of ANC was a rapid amortization and liquidation event under the transaction
documents; however, the ARG transactions did not enter into early amortization because the bond insurer
in the deal, MBIA Insurance Corporation, which ultimately became the controlling party, temporarily
waived the amortization event and chose not to liquidate the fleet. ANC continued to operate in bankruptcy until October 2003 when Vanguard Car Rental (Vanguard) was formed by Cerberus Capital
Management, L.P. to purchase the U.S. and Canadian assets of ANC. During the bankruptcy, bondholders under the securitized transactions received timely interest and principal as scheduled (except for a
delay of two months on principal due on the 1999-1 tranche).
In the case of Budget, lease payments continued even after the bankruptcy filing. Cendant Corporation
(Cendant), parent of Avis at that time, purchased Budget in November 2002 and ultimately refinanced
Budget’s outstanding deals.
More recently, rental car ABS transactions have been affected by the bankruptcies of General Motors
Corporation (GM) and Chrysler Group LLC (Chrysler), which is discussed in the Credit Quality of the
Auto Manufacturers section below.
Prior to 1996, the major car rental car companies were owned by the large domestic manufacturers with
GM having a stake in Avis and National, Ford Motor Company owning Hertz and Budget and Chrysler
owning Dollar and Thrifty. In the late 1990s, the manufacturers started to divest their interests in their
rental car subsidiaries with GM selling its stakes in Avis and National, Ford selling Budget to Team Rental
Group and Chrysler spinning off Dollar and Thrifty through a public initial public offering. Avis was subsequently purchased by Cendant in 2001, which also later purchased Budget out of bankruptcy in 2002.
Ownership changes continued to occur through the mid-2000s with Hertz’s sale in late 2005 to a consortium of private equity companies. In August 2006, Avis Budget became a public company through the
split of Cendant into four separate companies. In August 2007, Vanguard was purchased by the owners
of Enterprise Rent-A-Car and is currently operated separately as a subsidiary of Enterprise Holdings,
Inc. The final move toward consolidation occurred in November 2012 when Dollar Thrifty Automotive
Group, after being pursued by both Avis Budget and Hertz Global, was acquired by the latter. As a result
of the industry consolidation, there are now three major participants in the U.S. rental car industry as
noted in the table below (Table 1).
Rating U.S. Rental Car Securitizations
February 2015
Table 1
Enterprise Holdings
Major Brands Operated
Avis Budget Group
The Hertz Corporation
Enterprise, Alamo, National Avis, Budget, Zipcar, Payless Hertz, Dollar, Thrifty, Firefly
2013 Fleet size (units)1
Global 2013 Revenues
$16.4 billion
$7.9 billion
$8.7 billion
Privately Held
Public Company
Public Company
BB low (Stable)
BB (Negative)
Global Locations3
2013 On Airport Market Share
Parent Company
DBRS Rating
1. Source: Enterprise – Enterpriseholdings.com figure also includes Enterprise Fleet Management vehicles; Avis – 2013 Annual Report;
Hertz – Q4 and FY 2013 Earnings Call Presentation.
2. Source: Enterprise – Enterpriseholdings.com. Includes commercial truck rental, corporate fleet management and retail car sales, Avis
– 2013 Annual Report. Vehicle rental only, Hertz – Q4 and FY 2013 Earnings Call Presentation. Vehicle Rental Only.
3. Source: Enterprise – Enterpriseholdings.com; Avis – 2013 Annual Report. Includes truck rental; Hertz – Hertz.com.
4. Source: Statista.com.
Key Variables Impacting Rental Car ABS Transactions
There are typically multiple components to the DBRS review of rental car ABS transactions: 1) the quality
of the rental car company as fleet servicer/operator and lessee in the transaction; 2) the credit quality of
the auto manufacturers of the fleet; and 3) the residual values of the fleet during a contemplated liquidation scenario.
While the DBRS liquidation scenario generally involves an analysis of the expected vehicle proceeds
after an operating company insolvency and subsequent fleet liquidation, DBRS typically considers the
operational capabilities of the company to manage fleet servicing and maintenance, logistics, fleet forecasting and fleet depreciation methodology. Proper maintenance of the fleet is an important component
of customer satisfaction, and vehicle condition at disposal in part determines the ultimate sales proceeds
upon disposition. While the liquidation scenario contemplates an operating company insolvency, DBRS
normally considers the overall financial condition of the operating company and available liquidity at the
operating company since, as lessee, it is responsible for making periodic lease payments. In addition, the
financial condition of the operating company may affect the ability of the ABS transaction to perform in
the event of a sudden market downturn. For example, rental car structures typically have mechanisms
whereby vehicle disposition proceeds are evaluated relative to their net book value (NBV) at disposal.
In the event that the fleet proceeds are less than the NBV, the operating company would be expected to
increase the available credit enhancement to maintain the borrowing base at the proper level. To the
extent that the issuer was unable to do so, the ABS transaction would enter early amortization which
could adversely affect the continuity of its ABS funding platform.
Rental car ABS transactions are directly exposed to the creditworthiness of the auto manufacturers through repurchase obligations on program vehicles whereby the manufacturer agrees to buy back
vehicles under certain terms at a specified price. Rental car ABS transactions also have indirect exposure
to the credit quality of the vehicle manufacturers in the case of non-program vehicles to the extent that a
manufacturer’s credit worthiness affects the residual values of its vehicles.
Rating U.S. Rental Car Securitizations
February 2015
In bankruptcy, a manufacturer may seek to terminate its obligation to repurchase program vehicles from
the rental car companies. DBRS generally expects the likelihood that a manufacturer would seek to terminate its repurchase obligations to be remote as the rental car companies still represent relatively large new
vehicle purchasers for the manufacturers and can therefore be strategically important to the manufacturer.
As shown in Chart 2 below, new vehicle sales into rental fleet, while down from the levels witnessed in the
mid-2000s, still remain a significant portion of overall industry sales.
Chart 2: New Vehicle Sales Into Rental and Rental Fleet Size
Average Fleet
Sales Into Rental Fleet
Source: NADA, Auto Rental News, Bobit Business Media.
The recent bankruptcies of GM and Chrysler illustrate the important relationship between the auto manufacturers and the rental car companies. Chrysler filed for bankruptcy on April 30, 2009, and GM filed for
bankruptcy on June 1, 2009. During the bankruptcy process, both companies affirmed their contractual
obligations under the vehicle repurchase agreements; however, it should be noted that rental fleet sales
historically were and currently are a significant portion of sales for both manufacturers. To the extent that
a manufacturer was less reliant on rental car sales, a declaration not to affirm its repurchase obligations
in bankruptcy may be more likely. To mitigate manufacturer exposure, the rental car companies have
sought to increase overall manufacturer diversification and have also generally reduced the percentage of
program cars in the rental fleets. This was driven in part by the recent strength in the used vehicle market
that has reduced the holding costs for non-program vehicles. In addition, GM and Chrysler emerged from
bankruptcy with a cost structure that allowed them to rationalize production with demand and, consequently, business models were less reliant on sales into rental fleet and the terms under which program
vehicles were made available to the rental car companies were generally less attractive.
Rental car transactions are exposed to the residual value risk through non-program or at-risk vehicles that
are not subject to a buyback agreement with manufacturers or potentially through program vehicles that
become ineligible to repurchase and are disposed by the rental car company through other channels. In
rental car ABS transactions, the monthly lease payment usually consists of a portion that covers transaction expenses such as interest and fees as well as a portion that covers vehicle depreciation. Depreciation
rates are established by the rental car company largely based upon a vehicle’s expected hold time, reviewed
periodically and adjusted if necessary. To the extent that vehicles depreciate faster than expected and
depreciation adjustments are insufficient to maintain parity between the market value and book value,
there can be a loss at the time of disposition. ABS transactions typically have mechanisms that periodically check the market value of the vehicles relative to book value and, to the extent that the market value
is less than the book value, the issuer would be obligated to increase credit enhancement in an amount
equal to such shortfall. As a result, DBRS typically expects that, at the commencement of the liquidation
Rating U.S. Rental Car Securitizations
February 2015
scenario, the market value and the book value of the vehicles will be equal. Given the potential market
value volatility upon disposition, DBRS normally assumes various market value declines based on the
targeted rating.
Chart 3 below shows the Manheim Used Vehicle Value Index which uses January 1995 as the base period
(value at January 1995 = 100).
Chart 3: Manheim Used Vehicle Value Index
Source: Manheim.com.
As illustrated, throughout the mid-1990s, the market generally trended upward with the first significant
decline happening shortly after the events of 9/11. The used vehicle market after 9/11 was largely driven
by generally tepid economic conditions, rapid de-fleeting by the rental car companies given the precipitous decline in air travel and a surge in incentives by the manufacturers to encourage sales.
From January 2003 until August 2007, used car prices again trended upwards with occasional fluctuations. In late 2007 and into 2008, the used vehicle market started to decline as recessionary conditions
in the United States emerged. The largest decline in used car prices occurred in October and November
2008 when prices declined almost 6% per month; however, the market recovered quickly and used vehicle
values again increased steadily into 2012 and have generally been stable throughout 2013 and 2014,
outside of normal seasonal fluctuations.
As described previously, typically there are structural features included in rental car ABS transactions
by issuers intended to limit the impact of sudden market value changes on non-program vehicles in ABS
transactions. To date, these features have included: 1) a monthly mark-to-market test using recognized
used vehicle industry guide publications and 2) a monthly test on disposition proceeds compared with the
NBV of vehicles sold. Most often these tests are used concurrently and the test that indicates the greatest
shortfall, if any, would apply.
In addition, issuers of rental car ABS transactions also generally incorporate structural features that
are intended to address the impact of a manufacturer bankruptcy on program vehicles. Typically, after
a grace period, program vehicles from bankrupt program manufacturers are included in a transaction
subject to potential valuation haircuts. The grace period is designed to allow the market time to stabilize
as recent experience has shown that market volatility can be short-lived. The haircuts provide ABS investors additional protection in the event that the manufacturer does not affirm the program agreements. If
the bankrupt manufacturer were to affirm the manufacturer’s obligations under the program agreements,
such vehicles would not be subject to any additional valuation haircuts and would receive full credit
in the borrowing base. If the manufacturer were not to affirm the program agreement, then the rental
car company could re-designate these vehicles as non-program vehicles, provided that it contributes an
Rating U.S. Rental Car Securitizations
February 2015
amount equal to the difference between the vehicle’s current NBV and the vehicle’s NBV had such vehicle
been a non-program vehicle as of the re-designation date as specified in the transaction.
DBRS has analyzed changes in used car values to determine the extent to which used car values may
decline under a liquidation scenario. This analysis is factored into the haircuts that applied to the residual
values of the collateral in determining the ratings for a transaction given the proposed credit enhancement
The chart below (Chart 4) summarizes some historical data with respect to the maximum rolling declines
for the Manheim Used Vehicle Value Index. As indicated by this data, the largest declines were observed
during 2008.
Chart 4
1 month
2 month
3 month
4 month
5 month
6 month
7 month
8 month
9 month
Transaction Structures
Rental car ABS transactions are typically financed either through asset-backed commercial paper conduits
or as term transactions. Transactions have generally been structured using a master trust where the issuer
may issue multiple series of either fixed- or floating-rate notes utilizing a revolving period often similar to
that found in credit card master trusts. The revolving period provides the issuer with the ability to achieve
longer-term funding as the rental fleets turn over quickly with vehicle holding periods ranging between
five months and 24 months (depending on whether the vehicles are program or non-program). Issuance
until the late 2000s was usually enhanced (wrapped) by monoline bond guarantors but, since 2009, rental
car ABS transactions have been exclusively completed on a senior-subordinate basis.
Rental car ABS transactions are typically structured as a true lease. In a true lease transaction, the vehicles
are titled in the name of the special-purpose entity (SPE) with the indenture trustee/custodian named as
lienholder on the certificates of title. This structure should facilitate an orderly fleet liquidation in the
event of an operating company bankruptcy by minimizing the probability that competing creditors would
make a claim on the fleet assets.
In a transaction where the lease is a finance lease, the vehicles would be titled in the name of the lessee. In
that case, the vehicles may be included in the bankruptcy estate if the rental car company were to file for
bankruptcy. In such cases, it is difficult to determine the amount of time it might take to gain access to the
vehicles for liquidation purposes. As a result, finance lease structures are more typically seen in commer10
Rating U.S. Rental Car Securitizations
February 2015
cial conduit transactions where this uncertainty is addressed through the inclusion of liquidity (directly or
indirectly) from the provider of the facility.
Rental car ABS transactions use a bankruptcy-remote SPE which issues securities the proceeds of which
are used to purchase either non-program or program vehicles subject to purchase agreements with the
manufacturer. In the case of program vehicles from eligible manufacturers, the rights under these manufacturer agreements are assigned to the SPE.
The SPE is normally administered by the rental car company under an administration agreement which
specifies the responsibilities of the rental car company in the transaction. DBRS typically reviews this
agreement and the responsibilities of the rental car company in connection with this agreement. A backup
administrator may also be appointed by the issuer to mitigate risks related to the transfer of these functions if the rental car company goes into bankruptcy or otherwise cannot perform these functions.
payments $
Rental Car
(Lessee & Servicer)
payments $
Lease / servicing
Buyback proceeds
(Issuer & Lessor)
Interest Rate Hedge
(If required)
Proceeds $
Proceeds $
vehicle disposition
Note: The structural diagram above depicts a simplified rental car ABS structure for illustrative purposes and does not include all
potential parties. Each proposed rental car ABS transaction and structure is normally reviewed individually.
In a typical rental car ABS transaction, the SPE enters into a lease agreement with the rental car company
through which the SPE leases the vehicles it has purchased for use in the rental car company’s fleet. The
rental car company is responsible for making monthly lease payments to the SPE designed to cover
interest payments, vehicle depreciation, program carrying costs and other expenses associated with the
Under the manufacturer agreements, the servicer on behalf of the SPE will arrange for program vehicles
to be returned to manufacturer designated sites. Historically, non-program (or risk) vehicles were primarily disposed of through wholesale auction. Recently, companies seeking to maximize the proceeds
Rating U.S. Rental Car Securitizations
February 2015
of risk vehicle sales have utilized alternative distribution channels including online auctions, direct sales
to dealers, rent-to-buy programs aimed at direct sales to customers and the establishment of companyowned retail outlets. A common structural feature incorporated by issuers has been the inclusion of a
liquidation agent who, in the absence of an operative servicer, can facilitate the return of program vehicles
to the manufacturer and otherwise dispose of risk vehicles. The liquidation agent is usually an entity with
extensive automotive industry expertise, which may enhance the facilitation of an orderly fleet liquidation
in the event of a rental car company bankruptcy and its potential inability to liquidate the fleet.
The most common forms of credit enhancement presently seen in rental car ABS transactions include a
combination of subordination, overcollateralization, letters of credit and reserve accounts. A portion of
the credit enhancement is typically provided by the issuer in liquid form to address the payment of interest
and expenses during the liquidation scenario. As part of the liquidation scenario, DBRS generally assumes
that an automatic stay is adopted following the bankruptcy of the rental car company during which lease
payments may not be made.
Given the low interest rate environment during the last several years, most term issuance has been on a
fixed-rate basis; however, to the extent that a transaction were to issue floating-rate notes, an interest rate
hedge may be included by the issuer to mitigate the risk associated with interest rate fluctuations. Interest
rate hedges (e.g., caps) may create greater certainty in a transaction regarding the ability of the proposed
liquid portion of the credit enhancement to make interest payments during the assumed stay and liquidation periods. During an evaluation, DBRS generally assumes that the cap is at the strike rate specified in
the hedging documentation.
For AAA-rated securities, a derivative counterparty is typically expected to maintain a DBRS credit rating1
consistent with the counterparty criteria per DBRS’s Legal Criteria for U.S. Structured Finance.
If the proposed transaction does not include a derivative agreement to hedge interest rate risk, DBRS may
apply additional stresses to the transaction cash flows to simulate a stressed interest rate environment.
To quantify the effect of interest rate risk on a proposed transaction, DBRS typically applies interest rate
curves based on the DBRS Unified Interest Rate Model for Rating U.S. Rental Car Securitizations, reflecting both upward and downward stresses.
Prior to the financial difficulties experienced by the large domestic auto manufacturers (which ultimately
led to the bankruptcies of GM and Chrysler), program vehicles were commonly purchased under repurchase agreements whereby the manufacturer agreed to a repurchase price, subject to certain limitations
involving holding time and wear and tear. To mitigate exposure to the declining financial health of certain
manufacturers, rental car companies began to shift from guaranteed repurchase programs to guaranteed depreciation programs (GDPs). Under GDPs, the manufacturer and rental car company agree to a
depreciation schedule for a vehicle and after the vehicle is disposed of either at auction or otherwise, the
manufacturer is obligated to remit any shortfalls based on the agreed upon depreciation rates and the
sales proceeds. These programs effectively reduce the amount of the receivable due from the manufacturer
(netting amount to be paid against amounts received at disposition). In addition, to mitigate exposure
to manufacturer credit risk, manufacturer agreements may include provisions whereby the rental car
company, SPE or auction house retains title to the vehicle until repayment of the manufacturer receivable.
1. See Legal Criteria for U.S. Structured Finance.
Rating U.S. Rental Car Securitizations
February 2015
Rental car transactions typically include a revolving period, a controlled amortization period and a rapid
amortization period.
Revolving Period
During the revolving period of the transaction, interest payments are made on the notes but no principal
payments are made. Principal proceeds from lease payments and vehicle sales are used to purchase new
vehicles (or pay down other series of notes that have reached an amortization period).
Controlled Amortization Period
The controlled amortization period follows the revolving period as long as no rapid amortization event
has occurred. During the controlled amortization period, there are scheduled principal payments on
the notes in addition to ongoing interest payments. New vehicle purchases may occur to the extent that
there are funds in excess of those necessary to pay the scheduled principal and interest payments. The
controlled amortization period is generally between six months and 12 months in length and is typically
designed to fully repay the notes by the expected final distribution date.
Rapid Amortization Period
A rapid amortization period takes place if certain adverse events occur such as the breach of an early
amortization trigger or an event of default. Typical transaction rapid amortization triggers are outlined
below in the Lease Events of Default and Early Amortization Events sections. Breaching one of these
triggers usually terminates the revolving period, resulting in no new vehicle purchases and any outstanding notes being repaid on an accelerated basis as the fleet is liquidated. Disposition timing depends on fleet
size, bankruptcy issues and the ability of the lessee/servicer or other disposition agent to liquidate the fleet.
Legal Final Maturity Date
The legal final maturity date is normally set by the issuer to be one year after the expected final payment
date of a transaction. If the notes are not repaid by the expected final distribution date, then an early
amortization event goes into effect to facilitate repayment prior to the legal final maturity date.
A borrowing base is normally maintained in a rental car ABS transaction to provide adequate assets to
repay the asset-backed notes if there is a bankruptcy of the rental car company and liquidation of the fleet.
The borrowing base calculation typically consists of the following:
1. The NBV of program vehicles;
2. The NBV on non-program vehicles;
3. The accrued and unpaid lease payments due from the rental car company;
4. Receivables due from the manufacturers for program vehicles returned;
5. Receivables due from auctions; and
6. Cash and permitted investments on deposit in the collection account.
Generally, borrowing base credit is only given for receivables from investment grade manufacturers;
however, recent events have shown that there is strong motivation for manufacturers to maintain their
relationship with the rental car companies as evidenced by both Chrysler and GM affirming their program
agreements during bankruptcy. As a result, in certain circumstances where there are sufficient structural
protections, consideration may be given to receivables from non-investment-grade manufacturers. In such
case, structural protections may be included by an issuer that consist of limits related to manufacturer
rating, receivable size and aging.
Rating U.S. Rental Car Securitizations
February 2015
Lease Events of Default
Under the lease agreement with the rental car company, there should be certain events of default under
which the SPE is no longer permitted to purchase additional vehicles. These events usually include the
1. Failure of the rental car company to pay principal or interest on any lease following the applicable
grace period;
2. Certain events of bankruptcy proceedings are initiated against the rental car company;
3. Failure of the rental car company to comply with any provision of the applicable lease agreement that
continues after the applicable grace period;
4. Material breach of a representation or warranty of the rental car company as per the applicable lease
5. Failure to maintain insurance on the vehicles as specified by transaction documentation; and
6. Unauthorized transfer or assignment of the lease by the lessee.
If a lease default occurs and continues following the applicable grace period, then an early amortization
event would generally occur unless waived by the requisite investors.
Early Amortization Events
Rental car ABS transactions usually includes certain events which terminate the revolving period and
commence repayment of the notes. Typically, rental car ABS transactions include the following rapid
amortization events:
1. The issuer defaults in the payment of any interest owed on the notes and that default continues after
an applicable grace period;
2. The issuer defaults in the payment of any principal due on the notes and that default continues after
an applicable grace period;
3. The issuer fails to comply with any other agreements, covenants or provisions of a series that materially
and adversely affect the interest of the noteholder of any series after an applicable grace period;
4. A borrowing base deficiency exists and continues after an applicable grace period;
5. The liquidity amount is less than the liquidity amount specified in the transaction;
6. A lease event of default occurs and is continuing following the applicable grace period;
7. The commencement of bankruptcy of the issuer or the rental car company which continues following
any applicable grace period;
8. Any representation or warranty made by the issuer is materially false and adversely affects the interest
of the noteholders and is not cured after an applicable grace period following written notice by the
trustee on behalf of the noteholders.
Manufacturer Event of Default
The bankruptcy of a manufacturer supplying program vehicles in a rental car ABS transaction is generally
considered a manufacturer event of default. Transaction documents normally specify whether the conse14
Rating U.S. Rental Car Securitizations
February 2015
quences of such default are effective immediately or subject to a grace period. Such consequences usually
include provisions for the rental car company to continue to include program vehicles from bankrupt
manufacturers that do not affirm the related program agreements in the transaction; however, transaction
documents usually include a mechanism whereby the rental car company can elect to re-designate such
vehicles as non-program vehicles. In that case, the vehicles are usually re-depreciated as if they were nonprogram vehicles, with the rental car company obligated to contribute any resulting shortfall as credit
Usually, a manufacturer event of default does not occur until some specified grace period after the bankruptcy filing. During this period, should the bankrupt manufacturer affirm their buyback obligations in
court, then a manufacturer event of default would not be deemed to have occurred.
Operational Risk Review – Originator and Servicer
In a typical ABS transaction, the originator and servicer review process evaluates the quality of the parties
that originate and service the assets that are about to be securitized in a transaction rated by DBRS. While
DBRS does not assign formal ratings to these processes, it typically conducts operational risk reviews
to assess if an originator is acceptable and incorporates the results of the review into the rating process.
Unlike a typical ABS transaction where the underlying asset supporting the ABS transaction consists of
a loan or a lease originated by the sponsor, in rental car ABS, the originated asset supporting repayment
of the notes generally consists of automobiles that are acquired by the transaction sponsor pursuant to
purchase agreements with the respective manufacturers.
DBRS usually begins the initial originator review process by sending a questionnaire to the company
that outlines the topics to be covered during the discussion with management and includes a list of documents to be provided such as organizational charts, financial statements and rental process guidelines. In
instances where DBRS determines that the originator is below average, issuers may incorporate certain
structural enhancements into a proposed transaction such as additional credit support so that DBRS can
rate the transaction. In the event that DBRS determines that an originator is unacceptable, it may refuse
to rate the deal.
The originator review process typically involves a review and analysis of the following:
• Company and management
• Financial condition
• Controls and compliance
• Origination and sourcing
• Rental process
• Technology
For details on the originator review process, please refer to the DBRS methodology Operational Risk
Assessment for U.S. ABS Originators.
The servicer review process evaluates the quality of the parties that service or may conduct backup servicing functions related to the assets being securitized in a transaction rated by DBRS. DBRS typically begins
the initial servicer review process by sending a questionnaire to the company that outlines the topics to
be covered during the discussion with management and includes a list of documents to be provided such
as organizational charts, financial statements and performance statistics. In instances where DBRS determines that the servicer is below average, issuers may incorporate certain structural enhancements into a
proposed transaction such as additional credit support, dynamic triggers or the presence of a warm or hot
backup servicer so that DBRS can rate the transaction.
Rating U.S. Rental Car Securitizations
February 2015
The servicer review process typically involves an analysis of the following:
• Company and management
• Financial condition
• Controls and compliance
• Rental process
• Vehicle maintenance and tracking
• Vehicle turnback and remarketing
• Investor reporting
• Technology
For details on the servicer review process, please refer to the DBRS methodology Operational Risk
Assessment for U.S. ABS Servicers.
Fleet Assets
DBRS fleet analysis normally considers the type of vehicle acquisition agreements, the credit quality of the
manufacturer and the vehicle type. The types of agreement include: (i) vehicles which are acquired under
repurchase or guaranteed depreciation programs, both generally referred to as program vehicles; and
(ii) vehicles acquired under contracts without any manufacturer repurchase or non-program or at-risk
vehicles. DBRS assesses the potential impact of any manufacturer concentrations and how the manufacturer’s credit rating might affect residual values. Typically, rental car companies seek to build the fleet that
complements customer demand. For example, airport locations generally might consist primarily of midsized vehicles while vacation destinations may have relatively more sport-utility vehicles or minivans to
accommodate the needs of traveling families. DBRS considers any significant vehicle type concentrations
or vehicle geographic concentrations that might affect fleet residual values under a liquidation scenario.
The proportion of non-program and program vehicles in a company’s rental fleet depends on the company’s fleet strategy which will be driven, in part, by the expected holding costs of program vehicles versus
non-program vehicles. Expected holding costs could also be affected by a manufacturer’s financial condition and concerns regarding its ability to repurchase vehicles. Concerns regarding the ongoing viability
of a manufacturer could also deter consumers from purchasing such vehicles, with the decreased demand
adversely affecting residual values. While program vehicles enhance fleet flexibility to meet seasonal
demand and eliminate residual value risk, such vehicles usually come with exposure to the credit condition of the manufacturer. On the other hand, while non-program vehicles reduce manufacturer credit
exposure, such vehicles usually increase exposure to conditions in the used vehicle market.
DBRS is generally skeptical about fleet composition between program vehicles and non-program vehicles
as DBRS criteria and analysis explicitly incorporate the unique risks inherent for each type of vehicle,
detailed below in the Liquidation Analysis and Credit Enhancement section.
Program vehicles
Program vehicles are acquired from an eligible manufacturer under agreements which state the terms and
conditions under which a vehicle may be repurchased by the auto manufacturer. The terms and conditions
in these agreements typically include timing of return, mileage limitations and damage standards designed
to exclude normal wear and tear. Program agreements also generally specify financial parameters such
as the amount and timing of payment. To the extent that return conditions are not fulfilled, financial
penalties may result or the vehicles may be declared ineligible for return. As described earlier, to mitigate
manufacturer credit risk, most program vehicles today are purchased under guaranteed depreciation
programs versus repurchase programs.
Rating U.S. Rental Car Securitizations
February 2015
Program agreements are generally negotiated annually between the rental car company and the auto manufacturer. The terms and conditions are proposed by the manufacturers ahead of the expected delivery of
any vehicles for that model year. DBRS typically reviews the general terms and conditions of these contracts and features, if any, that may have an impact during a potential liquidation scenario.
Non-Program Vehicles
Non-program vehicles or at-risk vehicles are purchased without any buyback obligation from the manufacturer, so the rental car company must dispose of those vehicles into the used car market and bear any
gain or loss on the sale of those vehicles. Historically, rental car companies have included a majority
of program vehicles in their fleets; however, over the past several years, the percentage of non-program
vehicles has increased substantially as discussed above in the Auto Manufacturers Credit Quality section.
When analyzing the underlying fleet supporting a rental car ABS transaction, DBRS generally considers
the financial condition of the various manufacturers in the fleet. Manufacturer risk can be direct, as is the
case for program vehicles, or indirect, as concerns over a manufacturer’s ongoing viability could lead to
market dislocation and may adversely affect the residual value of such vehicles. To evaluate these risks,
DBRS usually reviews the fleet breakdown between investment-grade and non-investment-grade manufacturers for both program vehicles and non-program vehicles.
Transaction documentation generally specifies any applicable concentration limits for eligible manufacturers or manufacturer groups. Concentrations limits typically consider historical and projected fleet
purchases and provide the rental car company with sufficient operating flexibility, yet serve to mitigate
concentration risks. Transaction documentation may allow for the inclusion of vehicles from non-eligible
manufacturers, though such limits are usually of a de minimis nature.
To assist in the review of a rental car ABS transaction, DBRS requests three to five years of fleet performance data that normally includes the following:
1. Gains and losses on the sale of risk vehicles by manufacturer, generally on a model year;
2. Disposition history for program vehicles by model year detailing any historical loss experience associated with vehicle return;
3. Salvage and theft/conversion history for program and non-program vehicles;
4. Historical fleet depreciation experience for program and non-program vehicles, generally on a manufacturer-by-manufacturer basis;
5. Capitalized cost for program and non-program, vehicles, generally on a manufacturer by manufacturer
basis; and
6. Additional information that may assist with analysis of a potential fleet liquidation including details
relating to interest rate hedging, if applicable, and transaction expenses such as trustee, administrative
or liquidation agent or other fees.
Rating U.S. Rental Car Securitizations
February 2015
Liquidation Analysis and Credit Enhancement
DBRS analysis of rental car ABS transactions typically includes an assumption that the rental car company
becomes insolvent and, after an automatic stay period, vehicles are liquidated to repay any outstanding
ABS notes. DBRS generally assumes that the automatic stay period will last 60 days from the bankruptcy
filing, consistent with Section 362 of the U.S. Bankruptcy Code. After the expiration of the automatic stay
period, DBRS normally assumes that the primary source of funds to repay noteholders is from a liquidation of the fleet assets. DBRS analysis considers the ability of the proposed liquid credit enhancement to
maintain current interest payments to investors and to pay other transaction expenses during the automatic stay period as it is assumed that the rental car company elects not to make lease payments during
the automatic stay period. DBRS also considers the credit enhancement available to relative to expected
fleet depreciation from bankruptcy until ultimate disposition of the vehicles as well as other potential
losses relating to the return or disposition of program vehicles and the sale of non-program vehicles.
With respect to investment-grade manufacturers and program vehicles, DBRS usually assumes that
such manufacturers will have the financial ability to make any and all payments due under the terms of
their respective program agreements. DBRS’s review typically considers the standards for vehicle return,
minimum holding periods and the ability of the rental car operator to manage the fleet relative to the
parameters specified in the program agreements. DBRS reviews historical fleet age and purchasing patterns
to assess whether program vehicles are likely to be subject to any minimum holding period charges upon
their return. In addition, for program vehicles, DBRS considers potential reconditioning expenses, other
incidental expenses and historical experience for program vehicles returned to the manufacturer. Such
vehicles may generate losses because of noncompliance with the terms of the program agreements for
reasons such as excess wear and tear or excess mileage. Normally, the aforementioned losses and expenses
are stressed based on the requested rating as shown in the chart below. Table 2 indicates the typical stress
range multiples for U.S. rental cars. The multiples are designed to capture uncertainties and variables
that may affect future transaction performance. The multiples in Table 3 are a guideline and may not be
applicable in all transactions.
Table 2
Stress Range
In developing an expectation of the bankruptcy stay period following the bankruptcy of the rental car
operator, DBRS may request a memorandum from the appropriate counsel in the transaction indicating
the counsel’s view as to how long it would take for the appropriate party to obtain possession of the
vehicles in the event of the bankruptcy of the rental car company.
As previously described, based on current bankruptcy laws in the United States and precedent bankruptcy cases in the rental car industry, DBRS typically assumes that no lease payments are made during
the 60-day automatic stay period. Based on the ANC and Budget bankruptcies, following the 60-day
automatic stay period, DBRS generally expects that the rental car company will either: (i) resume lease
payments and continue to use the fleet of cars or (ii) comply with transaction provisions that specify the
mechanics by which the vehicles can be secured and liquidated to repay noteholders.
Rating U.S. Rental Car Securitizations
February 2015
DBRS typically reviews the operational expertise of the rental car company and its ability to liquidate the
fleet of vehicles within a short time frame under stressful conditions as well as any other structural provisions such as the inclusion of a liquidation agent to facilitate a potential fleet liquidation. In addition,
DBRS considers any geographic concentrations or any other unique transaction characteristics that could
potentially affect fleet liquidation timing. The used vehicle market in the United States is quite large, with
total used vehicles running at approximately 40 million units during the last several years.2 Generally,
approximately 20% of the total used vehicle market is represented by current model year or one-year
prior vehicles, which constitute the vast majority of the rental fleets for the major rental car companies.3
The used vehicle market in the United States is a sizable, liquid and efficient market with companies like
Manheim, Inc. selling in excess of seven million vehicles annually.4 As a result, DBRS generally expects
that the used vehicle market would be able to absorb the fleet liquidation of a major rental car company
in a reasonable period of time.
Table 3 below shows the normal amount of time by rating category that DBRS usually assumes would
be necessary to liquidate a typical rental car fleet. These timelines may be adjusted based on DBRS’s
review of transaction structural features or fleet characteristics that could positively or negatively affect
the expected liquidation timing. In addition, when evaluating the proposed credit enhancement for a
transaction, DBRS typically assumes that sales are spread evenly over the assumed liquidation horizon,
although DBRS may consider other potential liquidation patterns that are less uniform. The time periods
are designed to capture the potential for increased market dislocation at higher rating categories and are
intended as a guideline, which may not be applicable for all transactions.
Table 3
Liquidation Period
1.5 months
3.0 months
5.0 months
7.0 months
Bankruptcy plus liquidation period
3.5 months
5.0 months
7.0 months
9.0 months
In the normal course of business, most rental car companies strive to depreciate their non-program
vehicles in a manner that results in minimal or no gain or loss upon disposition; thus, under normal conditions with a stable used vehicle market, in the event of a fleet liquidation, the NBV and market value of
the vehicles are expected to be substantially identical.
The ratings assigned by DBRS are, however, typically for investment-grade rated securities ranging from
BBB (low) to AAA. Accordingly, to assess the potential stresses necessary for each assigned rating, DBRS
has analyzed the used car market during historical periods of market dislocation based on information from auto industry sources such as Manheim Consulting, Adesa Analytical Services, Automotive
Lease Guide and non-program vehicle disposition history provided by certain rental car companies. This
analysis revealed that some of the most stressful periods in the used vehicle market were following the
events of 9/11 and late 2008 into early 2009 as recessionary conditions took hold on the U.S. economy.
2. CNW Marketing Research, Inc.
3. Manheim Consulting.
4. Manheim.com.
Rating U.S. Rental Car Securitizations
February 2015
Based on DBRS’s review of price changes during these stressful periods, DBRS developed market value
haircuts by rating category to assess potential market value declines. Table 4 indicates the typical market
value declines for non-program vehicles from investment-grade rated manufacturers during liquidation
for U.S. rental cars. The declines are designed to capture uncertainties and variables that may affect
future transaction performance. The market value declines for non-program vehicles from investmentgrade rated manufacturers during liquidation in Table 4 are a guideline and may not be applicable in all
Table 4
Stress Range
To address the possibility that a manufacturer’s deteriorating financial health adversely affects its vehicle
values concurrent with a fleet liquidation, DBRS typically applies an additional haircut to non-program
vehicles from below investment-grade manufacturers. The same haircuts are generally applicable to
program vehicles from non-investment-grade manufacturers and DBRS generally assumes that these
manufacturers are unable to fulfill their repurchase obligations under the program agreements. Table
5 indicates the typical additional market value declines for vehicles from non-investment-grade rated
manufacturers during liquidation for U.S. rental cars. The declines are designed to capture uncertainties
and variables that may affect future transaction performance. The additional market value declines for
vehicles from non-investment-grade rated manufacturers during liquidation in Table 5 are a guideline and
may not be applicable in all transactions.
Table 5
Stress Range
DBRS typically reviews the transaction costs and expenses such as servicing and administrative fees,
interest and liquidity fees as well as any other applicable fees such as those for the liquidation agent to
evaluate whether these expenses can be covered following a rental car company bankruptcy and subsequent liquidation scenario and the potential impact on payments of interest plus principal.
Generally, for assigned ratings, DBRS receives a request containing a proposed level of credit enhancement
based on whether vehicles are from program or non-program manufacturers and whether the manufacturer is investment grade or non-investment grade. In addition, requests may contain a proposal for credit
enhancement for any manufacturer receivables resulting from manufacturer repurchase or guaranteed
depreciation programs. As a result of the foregoing, credit enhancement in rental car ABS transactions is
dynamic based on the characteristics of the underlying fleet collateral.
In addition, in rental car ABS transactions, the credit enhancement for those vehicles which would be
disposed in the used car market will be subject to certain tests which are intended to true up the enhancement in the transaction to the extent that either: (i) the market value of the vehicles in the fleet falls below
the book value of the fleet or (ii) the actual disposition value received on vehicles sold falls below the book
value of those vehicles.
Legal Considerations
DBRS’s review of a rental car ABS transaction will generally include a review of various legal opinions
consistent with its Legal Criteria for U.S. Structured Finance. In addition, rental car ABS transactions
may result in additional legal considerations. Rental car ABS transactions may include provisions for the
rental car company to appoint a nominee that acts as nominee titleholder for the vehicles. In such cases,
DBRS typically reviews a legal opinion relating to the potential bankruptcy of the nominee. Such opinion
normally provides that the nominee has only bare title to the vehicle and no beneficial economic interest
and that, in the event of the nominee’s bankruptcy, the vehicles would not become part of the nominee’s
bankruptcy estate.
Another common feature in rental car ABS transactions is the presence of like-kind exchange programs
(LKEs). LKE programs allow for vehicles being leased to be exchanged for replacement vehicles in transactions qualifying for non-recognition of gain or loss under Section 1031 of the Internal Revenue Code and
the related Treasury Regulations. Under a LKE program, there is typically a Master Exchange Agreement
where an intermediary has agreed to act as a qualified intermediary (as such term is used in Treasury
Regulation Section 1.1031(k)-1 (g)(4)) for the purpose of effectuating such non-recognition transactions.
Under the tax code, no rental car company controlled entities are allowed to be in constructive receipt of
funds relating to exchanged vehicles. To satisfy this provision of the tax code, the qualified intermediary
is owned by an outside entity that specializes in these types of arrangements. As a result, there is a risk
that the assets and liabilities of the qualified intermediary could be combined with those of the qualified intermediary’s parent in the event of a bankruptcy relating to the qualified intermediary’s parent.
Accordingly, in such circumstances, DBRS typically reviews a non-consolidation opinion relating to the
qualified intermediary.
Please refer to the Legal Criteria for U.S. Structured Finance for a more detailed discussion of DBRS legal
DBRS describes its approach to surveilling U.S. rental car securitizations in the DBRS Master U.S. ABS
Surveillance Methodology.
Copyright © 2015, DBRS Limited, DBRS, Inc. and DBRS Ratings Limited (collectively, DBRS). All rights reserved. The information upon which DBRS ratings and reports are based is
obtained by DBRS from sources DBRS believes to be accurate and reliable. DBRS does not audit the information it receives in connection with the rating process, and it does not and
cannot independently verify that information in every instance. The extent of any factual investigation or independent verification depends on facts and circumstances. DBRS ratings,
reports and any other information provided by DBRS are provided “as is” and without representation or warranty of any kind. DBRS hereby disclaims any representation or warranty,
express or implied, as to the accuracy, timeliness, completeness, merchantability, fitness for any particular purpose or non-infringement of any of such information. In no event shall
DBRS or its directors, officers, employees, independent contractors, agents and representatives (collectively, DBRS Representatives) be liable (1) for any inaccuracy, delay, loss of data,
interruption in service, error or omission or for any damages resulting therefrom, or (2) for any direct, indirect, incidental, special, compensatory or consequential damages arising
from any use of ratings and rating reports or arising from any error (negligent or otherwise) or other circumstance or contingency within or outside the control of DBRS or any DBRS
Representative, in connection with or related to obtaining, collecting, compiling, analyzing, interpreting, communicating, publishing or delivering any such information. Ratings and
other opinions issued by DBRS are, and must be construed solely as, statements of opinion and not statements of fact as to credit worthiness or recommendations to purchase, sell
or hold any securities. A report providing a DBRS rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and
its agents in connection with the sale of the securities. DBRS receives compensation for its rating activities from issuers, insurers, guarantors and/or underwriters of debt securities
for assigning ratings and from subscribers to its website. DBRS is not responsible for the content or operation of third party websites accessed through hypertext or other computer
links and DBRS shall have no liability to any person or entity for the use of such third party websites. This publication may not be reproduced, retransmitted or distributed in any form
Corporate Headquarters
DBRS Tower
181 University Avenue
Suite 700
Toronto, ON M5H 3M7
TEL +1 416 593 5577