Avis Budget Car Rental LLC's Recovery Rating Profile
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October 13, 2011
Recovery Report:
Avis Budget Car Rental LLC’s
Recovery Rating Profile
Primary Credit Analyst:
Betsy R Snyder, CFA, New York (1) 212-438-7811; betsy_snyder@standardandpoors.com
Recovery Analyst:
Gregory Maddock, New York (1) 212-438-7205; greg_maddock@standardandpoors.com
Table Of Contents
Overview
Legal And Structural Considerations
Issuer Credit Rating Rationale
Recovery Analysis
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899513 | 300374394Recovery Report:
Avis Budget Car Rental LLC’s Recovery Rating
Profile
Overview
• On Oct. 3, 2011,Avis Budget Car Rental LLC(Avis Budget) completed the acquisition of Avis Europe PLC for
approximately $1 billion in cash plus the assumption of roughly $800 million in debt. In conjunction with the
acquisition, Avis Budget issued $250 million senior notes due 2020, arranged a $420 million secured term loan
due 2017, increased its existing revolving credit facility by $200 million, and increased an existing term loan by
$20 million.
• Standard & Poor's Ratings Services has assigned recovery ratings to the new senior note issue and the senior
secured term loan and is maintaining its ratings to the existing rated issues of Avis Budget.
• Our simulated default scenario contemplates a payment default in 2014, due to a severe decline in the travel
industry, encompassing both leisure and business travel.
• We believe that if Avis Budget defaulted, a viable business model would remain due to the company's extensive
network of rental locations and the public's need to rent vehicles.
Table 1
Avis Budget Group Inc. -- Credit Profile
Corporate credit rating* B+/Stable/--
Estimated gross EV at default (bil. $) 8.529
Simulated year of default 2014
Post-default values
Facility/Issue Estimated principal at default (mil. $) Issue rating Recovery rating Expected recovery Maturity
Secured debt
$1.4 bil. revolving credit facility 690 BB 1 90%-100% 2016
$292.8 mil. term loan B 271.5 BB 1 90%-100% 2016
$420 mil. term loan B 411.6 BB 1 90%-100% 2016
Unsecured debt
7.625% sr. fixed-rate notes due 2014 200 B 5 10%-30% 2014
Floating-rate notes due 2014 250 B 5 10%-30% 2014
7.75% sr. fixed-rate notes due 2016 375 B 5 10%-30% 2016
9.625% unsecured notes due 2018 450 B 5 10%-30% 2018
8.25% unsecured notes due 2019 600 B 5 10%-30% 2019
New 9.75% senior unsecured notes 250 B 5 10%-30% 2020
Avis Budget Group Inc.
3.5% convertible sr. notes due 2014 345 N/A NR N/A 2014
*As of Oct. 12, 2011. EV--Enterprise value. NR--Not rated. N/A--Not applicable.
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899513 | 300374394Recovery Report: Avis Budget Car Rental LLC’s Recovery Rating Profile
Legal And Structural Considerations
Capital structure
Avis Budget has concluded its purchase of Avis Europe PLC. Avis Budget increased its $1.2 billion senior secured
revolving credit facility maturing in 2016 to $1.4 billion and issued a $420 million term loan B maturing in 2017.
The company also increased its existing term loan, which also expires in 2016, by $20 million. Avis Budget also
issued an additional $250 million senior notes due 2020. The notes are obligations of Avis Budget and Avis Budget
Finance Inc. and enjoy the same guaranties as existing senior notes.
The greatest portion of Avis Budget's debt is at its bankruptcy-remote vehicle finance subsidiaries. Avis Budget's
unsecured debt and the term loan support the company's capitalization, while the revolver is substantially used for
letters of credit to enhance the overcollateralization of the vehicle finance subsidiaries and for insurance purposes.
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899513 | 300374394Recovery Report: Avis Budget Car Rental LLC’s Recovery Rating Profile
Security and guarantee package
The senior secured revolving credit facility and term loans are secured by all assets of the borrower and domestic
operating subsidiaries, except vehicles, and guaranteed by the domestic subsidiaries and the borrower's direct
parent. The unsecured notes are co-issued by Avis Budget and Avis Budget Finance Inc. and are also guaranteed by
the domestic operating subsidiaries and parents. The $345 million of convertible notes were issued by Avis Budget
Group Inc. and do not benefit from upstream guarantees.
Documentation/covenants
The revolving credit facility includes leverage and interest coverage covenants.
Jurisdictional/insolvency regime issues
The bulk of Avis Budget's operations occur in the U.S. and, before the Avis Europe acquisition, approximately 10%
of earnings come from international operations in Argentina, Australia, Canada, New Zealand, Puerto Rico, and the
U.S. Virgin Islands. The acquisition of Avis Europe will increase the foreign share of EBITDA to approximately
30%. We have assumed, for the purposes of the simulated default scenario, international operations are not affected
by a filing in the U.S. and continue to operate outside of bankruptcy.
Issuer Credit Rating Rationale
See Standard & Poor's research update on Avis Budget Group Inc., published Oct. 3, 2011, on RatingsDirect.
Recovery Analysis
Table 2
Avis Budget Group Inc. -- Stressed Valuation
Simulated default assumptions Simplified waterfall
Year of default 2014 Gross discrete asset value at default $8.529 bil.
EBITDA for 12 months ended 6/30/2011 $2.376 bil. Administrative expenses 0
EBITDA decline at default 55% Net discrete asset value $8.529 bil.
EBITDA at default $1.068 bil. Priority claims (asset-backed loan debt) $6.433 bil.
Implied enterprise value /EBITDA multiple 7.9x Net value available to creditors $2.097 bil.
LIBOR/margin rise 300 basis points Secured first-lien debt $2.053 bil.
Recovery expectations 90%-100%
Unsecured notes $2.212 bil.
Recovery expectations 10%-30%
Subordinated notes $351 mil.
Recovery expectations N/A
Note: All debt amounts include six-months prepetition interest.
Simulated default scenario
Our simulated default scenario contemplates a severe decline in the travel industry, causing a decrease in revenue
from transactions initiated by the traveling public. The scenario envisions a general recession and a continued
decrease in travel, resulting in a substantial reduction of the borrower's rental car transaction volume and pricing.
We expect that the collateralized fleet funding programs would remain intact and that the outstanding letters of
credit under the revolving credit facility would not be drawn. Other assumptions made in the default scenario
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899513 | 300374394Recovery Report: Avis Budget Car Rental LLC’s Recovery Rating Profile
include:
• A 55% EBITDA decline in 2014 from the 12 months ended June 30, 2011;
• LIBOR at default of 250 basis points (bps);
• A 100-bps increase in credit premiums as covenant levels are tested before default; and utilization of the revolving
credit facility at $690 million (the balance of the facility is assumed to be utilized by letters of credit that we
assume remain undrawn at default). Note, the revolving credit facility includes a $150 million accordion feature
that we have assumed is not utilized.
Valuation
We believe that if Avis Budget defaulted, a viable business model would remain due to the company's extensive
network of rental locations and the public's need to rent vehicles. As a result, lenders would achieve the greatest
recovery value through reorganization rather than liquidation.
In arriving at an enterprise valuation, we employed a discrete asset method for domestic assets, since nearly all assets
of the company are pledged. We valued the 30% of the enterprise attributable to foreign subsidiaries (including Avis
Europe) on an enterprise valuation basis using a 5.5x multiple of default EBITDA. We then assumed this value to be
realized at 80%, with 66% of the value allocated to the senior secured lenders and the balance accruing to the
benefit of unsecured noteholders and claimholders.
We applied the following realization rates to the domestic asset values as of June 30, 2011:
• 70% of accounts receivable;
• 80% of net rental equipment;
• 42% of net property; and
• Trademark value for the several U.S. brands at $481 million.
We assumed administrative expenses are incorporated in the realization rates. We also assumed nondebt unsecured
claims (rejected operating leases) of $119 million.
Outcome
These discrete asset valuation assumptions yield about $2.1 billion in value for the senior secured lenders; this
amount excludes the value of the vehicles (and related domestic debt), but includes the value represented in the
overcollateralization. This compares with an estimated $2.1 billion in funded first-lien claims (revolver, term loans
outstanding, European vehicle debt, and six-months accrued interest at default). Under the simulated default
scenario, the realizable assets pledged to secure the bank debt afford those facilities the expectation of very high
(90% to 100%) recovery in a payment default scenario. The senior unsecured noteholders benefit from the
overcollateralization of the secured lenders and from the unpledged portion of the foreign subsidiaries' shares,
affording the senior unsecured noteholders claim of $2.2 billion (including six-months accrued interest expense) plus
the other unsecured liabilities noted above the expectation of modest (10% to 30%) recovery at the low end of the
range.
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