Hertz Taps Rental-Car ABS Market for First Time Since Bankruptcy

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Hertz Corp. is tapping the asset-backed securities market this week with its first full-term rental-car securitization since November 2019, part of its emergence from Chapter 11 protection.

Proceeds from its inaugural post-bankruptcy ABS will be used to finance the purchase of new vehicles to be leased to Hertz under a so-called master lease agreement. It will also be used to refinance both its original pre-bankruptcy legacy fleet-financing facility, as well as a $4 billion interim facility established last November with Athene USA Corp., an affiliate of Apollo Capital Management Inc., as a stepping stone toward an ABS transaction.

The total $2.2 billion offering, composed of two bond series, is expected to meet strong demand from investors who have a renewed confidence in the rental-car sector as travel picks up post-pandemic.

“We’re past the recovery phase in the rental-car industry,” Scott Hofer, a senior ABS analyst at Loomis, Sayles & Company, said in an interview. “Used car prices are at an all-time high and some rental-car sponsors believe their fleets will reach pre-pandemic levels in just a few months. Moreover, the relatively wider spreads on this transaction compared to other rental-car ABS issuers will likely attract demand at these levels.”

“This is definitely a large transaction,” added John Kerschner, head of securitized products at Janus Henderson Investors. “But given the strong fundamentals in the rental-car business, I feel they will be able to get it done.”

The deal will likely satisfy yield-hungry investors, market observers say, as risk premiums at price talk are relatively wide compared to other recent rental-car ABS from issuers such as Avis Budget Group Inc. In fact, Avis landed one of its tightest rental-car ABS spread levels in 20 years on its last transaction in May, Loomis’ Hofer said.

“With spread levels being compressed across almost all ABS sectors, this deal should get interest as it’s a real opportunity to pick up yield,” said Matthew Corn, an ABS trader at Breckinridge Capital Advisors.

For example, it’s very rare for a senior AAA tranche in an ABS to have triple-digit spreads, “particularly for a repeat issuer with years of performance history,” said Loomis Sayles’ Hofer, who saw initial price talk.

“There is a dearth of paper out there, especially with AAA tranches north of 100 basis points over benchmarks and BBBs north of 200 basis points,” said Janus Henderson’s Kerschner. “I think that gives them a fighting chance of getting it done.”

Master-Lease Assurance

Hertz is selling the bonds as it prepares to exit court protection at the end of June. The car renter won approval of a plan this month that will hand ownership to Knighthead Capital Management and Certares Management, pay off creditors in full and offer money to existing shareholders.

The rapid return of leisure travel in the U.S. sparked a fierce bidding war to buy the company out of bankruptcy, and Hertz and its rivals have struggled to keep enough cars for customers.

Another encouraging sign is that the new Hertz ABS structure addresses investors’ concerns regarding the prior financing facility, namely the indivisibility of the so-called master lease, Loomis’ Hofer said.

During last year’s bankruptcy proceedings, Hertz attempted to cherry pick which cars they wanted to pay for, Hofer said. Hertz wanted a judge to allow it to convert the master lease into 494,000 separate agreements so it can reject the terms on 144,000 vehicles.

“Although they ultimately came to an agreement with noteholders that resulted in a reduced lease payment schedule and an agreement to sell cars out of the fleet to pay off debt, some could argue that Hertz exploited a weakness in the documentation that hadn’t been addressed,” Hofer said.

Hertz didn’t return a voicemail and an email seeking comment.

The new structure, assuring the indivisibility of the master lease, gives investors added comfort on this issue, Hofer added, and will be another factor attracting ABS buyers to the offering.

The ABS transaction is being joint-led by Deutsche Bank, Barclays, BNP Paribas, and RBC.

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