TEXT - S&P affirms Hertz Global Holdings Inc

Mon Nov 19, 2012 10:46am EST

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Overview
     -- Car and equipment rental and leasing company Hertz Global Holdings 
Inc. (Hertz) has received regulatory approval to acquire competitor
Dollar Thrifty Automotive Group Inc., and we expect the transaction to close
shortly.
     -- We are affirming our ratings, including the 'B+' corporate credit 
ratings on Hertz and its major operating subsidiary Hertz Corp.
     -- We are also removing all ratings from CreditWatch, where we placed 
them with negative implications on Aug. 27, 2012, when the company announced 
the proposed acquisition. 
     -- The outlook is stable, reflecting our expectation of stable to 
modestly improving credit metrics, pro forma for the acquisition and the 
related debt. 

Rating Action
On Nov. 19, 2012, Standard & Poor's Ratings Services affirmed its ratings on 
Park Ridge, N.J.-based car and equipment renter and lessor Hertz Global 
Holdings Inc. and its major operating subsidiary Hertz Corp., including the 
'B+' corporate credit rating on both entities. We removed the ratings from 
CreditWatch, where we placed them with negative implications on Aug. 27, 2012, 
when Hertz announced it had entered into a definitive agreement to acquire 
competitor Dollar Thrifty Automotive Group Inc. (DTAG). Hertz received 
regulatory approval to acquire DTAG on Nov. 15, 2012, for $2.6 billion of cash 
and the assumption of $1.6 billion of DTAG's fleet debt, and we expect the 
acquisition to close shortly. The outlook is stable.

Rationale
The affirmation reflects Hertz's relatively stable financial profile, pro 
forma for the pending acquisition. This is Hertz's third attempt to acquire 
DTAG since April 2010, and each bid has become increasingly more costly. The 
company will fund the acquisition through a combination of Hertz's cash, 
DTAG's cash, and debt, which Hertz has already raised.  Hertz will also assume 
$1.6 billion of DTAG's fleet debt.  Hertz has indicated it expects at least 
$160 million of annual cost synergies, in addition to revenue opportunities 
from combining the two companies. The Federal Trade Commission approved the 
acquisition on Nov. 15, 2012, and Hertz agreed to divest its relatively small 
value brand Advantage and certain DTAG rental locations to gain approval. We 
believe the acquisition will aid Hertz's competitive position, expanding its 
reach in the value/leisure car rental segment.

Hertz's margins have improved over the past two years. Its operating margin 
(after depreciation) was 15% for the 12 months ended Sept. 30, 2012, compared 
with 10% two years earlier, because of higher revenues, cost reduction 
programs, and a strong used-car market that has resulted in lower vehicle 
expense. This has resulted in stronger credit metrics. For the 12 months ended 
Sept. 30, 2012, EBITDA interest coverage was 4.8x, compared with 3.3x two 
years earlier; funds from operations (FFO) to debt was 22%, compared with 19%; 
debt to EBITDA was 4.3x, compared with 5.2x; and debt to capital was 85%, 
compared with 88%. We expect incremental earnings and cash flow to result in 
stable to modestly improving credit metrics, despite the additional debt, for 
the combined entity.  Under our criteria, we characterize Hertz's business 
risk profile as "fair," its financial risk profile as "aggressive," and its 
liquidity as "adequate."

Hertz's acquisition of DTAG will result in an increase in its market share in 
the U.S. There currently are three major on-airport car rental companies: 
Hertz, Avis Budget Group Inc. (B+/Stable/--; parent of the Avis and Budget 
brands), and Enterprise Rent-A-Car Co. (BBB+/Stable/A-2; parent of the 
Enterprise, Alamo, and National brands), and each have approximately a 30% 
market share. DTAG accounts for most of the balance. DTAG focuses on the 
leisure segment, which has been faster growing and has been more profitable 
than business rentals over the past few years, while Hertz serves a mixture of 
business and leisure travelers. The acquisition will result in increased 
penetration for Hertz in the leisure segment, giving it a brand that can 
compete aggressively without undermining Hertz's pricing structure.

Our ratings on Hertz reflect an aggressive financial profile and the 
price-competitive, cyclical nature of on-airport car rentals and equipment 
rentals. The ratings also incorporate the company's position as the largest 
global car rental company and the strong cash flow its businesses generate.    

Liquidity
We characterize Hertz's liquidity as adequate. As of Sept. 30, 2012, the 
company had $453 million in unrestricted cash, $1 billion available under its 
$1.8 billion asset-based loan (ABL) which matures in 2016, and $796 million 
available under its various fleet financing facilities. The company has no 
financial maintenance covenants in its corporate credit facilities.  

In accordance with Standard & Poor's methodology and assumptions, in our view, 
the relevant aspects of Hertz's liquidity, pro forma for the potential DTAG 
acquisition, include:
     -- Coverage of cash uses by cash sources of at least 1.2x (the minimum 
threshold for an adequate designation) for the next year;
     -- Our expectation that net sources would be positive, even with a 15% 
decline in EBITDA, consistent with our criteria standard of 15%;
     -- Our belief Hertz's ability to absorb high-impact, low-probability 
events with limited refinancing is likely; and
     -- Generally prudent financial risk management, including long-term 
balance sheet goals.

We expect that sources of funds will consist of:
     -- Cash;  
     -- Funds from operations (as reported, not fully adjusted, based on our 
expectations) of more than $2 billion annually in 2012 and 2013; 
     -- Availability under its various credit facilities; and 
     -- Proceeds from vehicle sales.

Major uses of funds include:
     -- Combined debt maturities of about $1.3 billion in 2012 and $3.5 
billion in 2013; and 
     -- Capital expenditures for new vehicles. 

Recovery analysis
The rating on Hertz Corp.'s first-lien secured debt is 'BB' (two notches 
higher than the corporate credit rating), and the recovery rating is '1', 
indicating our expectation that lenders would receive very high (90%-100%) 
recovery in a payment default scenario. The rating on Hertz Holdings 
Netherlands BV's secured notes is 'B+' (the same as the corporate credit 
rating), and the recovery rating is '4', indicating our expectation that 
lenders would receive average (30%-50%) recovery in a payment default 
scenario. The rating on Hertz Corp.'s unsecured debt is 'B' (one notch lower 
than the corporate credit rating), and the recovery rating is '5', indicating 
our expectation that lenders would receive modest (10%-30%) recovery in a 
payment default scenario. The rating on Hertz Global Holdings Inc.'s 
subordinated and convertible notes is 'B-' (two notches lower than the 
corporate credit rating), and the recovery rating is '6', indicating our 
expectation that lenders would receive negligible (0%-10%) recovery in a 
payment default scenario. (See the recovery report on Hertz published Oct. 12, 
2012, on RatingsDirect). 

Outlook
The outlook is stable. Pro forma for the proposed acquisition, we anticipate 
Hertz's credit metrics will remain stable or improve modestly through 2013, 
with higher earnings and cash flow offsetting the incremental debt from the 
acquisition. We expect FFO to debt of about 20% and EBITDA to interest 
coverage in the low-4x area. We could raise the ratings if 
better-than-expected earnings or significant debt reduction resulted in FFO to 
debt increasing to the mid-20% level on a sustained basis.  Although less 
likely, we could lower the ratings if demand declined significantly or 
used-car prices declined substantially, resulting in a loss upon the sale of 
vehicles causing FFO to debt to decline to the mid-teens percent level on a 
sustained basis.    

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008


Ratings List
Ratings Affirmed; Ratings removed from CreditWatch
                                        To                 From
Hertz Corp.
 Corporate Credit Rating                B+/Stable/--       B+/Watch Neg/--
 Senior Secured                         BB                 BB/Watch Neg
   Recovery Rating                      1                  1
 Senior Unsecured                       B                  B/Watch Neg
   Recovery Rating                      5                  5

Hertz Global Holdings Inc.
 Corporate Credit Rating                B+/Stable/--       B+/Watch Neg/--
 Senior Unsecured                       B-                 B-/Watch Neg
  Recovery Rating                       6                  6

HDTFS Inc.
 Senior Unsecured                       B                  B/Watch Neg
   Recovery Rating                      5                  5

Hertz Holdings Netherlands BV
 Senior Secured                         B+                 B+/Watch Neg
  Recovery Rating                       4                  4
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