Avis could struggle to refinance ABS term debt despite TALF eligibility

This article is provided to FT.com readers by Debtwire—the most informed news service available for financial professionals in fixed income markets across the world. www.debtwire.com

--------------------------------------------------------------------------------------------------------

Avis Budget Group could struggle to refinance its upcoming ABS fleet term loan, despite having access to the Federal Reserve’s Term Asset-Backed Securities Loan Facility, two buysiders, two ratings analysts and a sellsider told Debtwire. The auto rental company faces the likelihood of stringent stipulations imposed by the rating agencies, they said.

The Fed requires all asset-backed securities issued under the government funded program to carry a triple-A rating from either Moody’s Investor’s Service, Standard and Poor’s or Fitch Ratings. Since neither Avis nor Hertz have tapped the market for TALF funded fleet rental ABS deals, the agencies have not issued guidelines on how to attain the rating.

Typical vehicle securitizations are collateralized by a rental car company’s fleet, restricted cash and OEM receivables, the first buysider explained. But due to the associated bankruptcy and solvency risks, receivables and fleets are less valuable, the same source said. Consequently, for companies such as Avis and Hertz to land a triple-A rating, they need to provide collateral far beyond the dwindling value of cars they want to refinance, he added.

Analysts believe, however, that Avis will likely need to provide 50%-60% of additional collateral to secure the sterling rating, the sources agreed. The speculated over-collateralization (OC) level means Avis would need to raise USD 600m-USD 720m in excess cash, based on the USD 1.2bn in maturing asset-backed term debt it faces over the next two years. The company has said it plans to address its ABS fleet debt maturities by issuing USD 1bn- USD 1.5bn of ABS term debt over the next 12 months.

By comparison, Hertz officials said during a conference call in April that it would need USD 700m in liquidity to hit a 55%-60% OC rate required for a triple-A rating based on current market credit enhancement levels. At the time, Hertz had USD 1.7bn of liquidity but raised an additional USD 1bn in June to position itself better to issue TALF debt, noted the first buysider, two sellsiders and two CDS traders.

Avis, on the other hand, has not tapped the market to address its ABS term debt yet. At 1Q09 ended 31 March, the company had USD 730m in liquidity, including USD 345m of cash and USD 385m available under USD 1.15bn revolver, according to SEC filings. Avis reported negative USD 9m of EBITDA in 1Q09, down from the USD 31m it generated in 1Q08.

While Avis could follow in Hertz’s footsteps and attempt to issue stock, issuing it at discount to its current USD 5.70 share price could make it hard to raise more than USD 100m in the equity market, a third buysider said.

A more likely route is tapping the convertible bond market, the buysider and a sellside analyst said. An Avis convert would need to carry a big coupon and a relatively low strike price premium to where the common stock is now to get investors excited about it, the buysider said. With Avis’s current unsecured 5-year bonds yielding 16%, the car rental company could issue a convert with an 8% coupon, but the value of that option would have to be such that it gets the option adjusted spread to 16%, he said.

An Avis official disputed the company’s need to raise excess cash, and said it already has excess collateral in its capital structure to handle additional over-collateralization needs as they change. The official declined to provide details about the existing excess collateral.

Avis’ debt has soared since the Fed’s announcement on 19 March that the TALF program would start accepting securities backed by car-rental fleets and news in May that the company obtained new financing commitments for its US fleet. The rally was bolstered by the run-up across the high yield market and surprising quarterly forecasts and capital raises from Hertz, the sources said.

Avis’ USD 375m 7.75% notes due 2016 last traded today at 68.1 on 2 July, while its USD 375m 7.625% notes due 2014 changed hands at 68.5 on 8 July, according to MarketAxess. Both bonds are up nearly 50 points since the beginning of March.

The company’s USD 875m term loan skyrocketed 40 points in the last four months and was last quoted at 78.15-79.2, according to Markit. Its revolver has moved up about 40 points during the same time to 73.375-74.625.

While CDS on Avis has also been one of the biggest gainers, it appears too tight at current levels, said a fourth buysider, the traders and the sellsider.

Avis’ five-year CDS gapped in by nearly 20 points during May on a vicious bout of short covering, despite the release of weak 1Q09 results, said the traders and the first sellside analyst. Protection is now quoted at 18 points upfront, with the one-year at around 6.5 points upfront, a trader said.

In total, Avis faces USD 3.5bn in upcoming 2009 and 2010 maturities. The company has already taken care of its USD 300m operating lease debt, according to the company’s June investor presentation, and it plans on renewing its USD 2bn bank conduit facility.

--------------------------------------------------------------------------------------------------------

For more information or to inquire about a trial please email sales@debtwire.com or call Americas: +1 212-686-5374 Europe: +44 (0)20 7059 6113 Asia-Pacific: +852 2158 9731