Avis Budget Group’s newly priced first lien notes add to its liquidity war chest as the car rental market faces upheaval from the COVID-19 pandemic and embattled competitor Hertz teeters on the brink of a Chapter 11 filing, according to six sources following the deal.

Downward pressure on fleet valuations resulting from Hertz’s distress in the near term could eat into Avis’s liquidity, while a potential Hertz bankruptcy would shape the longer-term competitive landscape for car rental companies already undergoing vast changes due to COVID-19, the sources added.

For its part, Avis, which has been consistently free cash flow positive in recent years, is working to cut costs and reduce its fleet in order to bring a deep cash burn down to more sustainable levels by mid-summer, the sources said.

Avis’s deal—the upsized USD 500m 10.5% first lien notes due 2025, priced with a 97 OID—will help fill the liquidity hole in the meantime. And it comes after its lenders amended senior credit facilities to allow USD 750m of additional first lien debt, representing a supportive stance of existing bank lenders.

Led by Citi, the notes priced today at the wide end of price talk at a 10.5% coupon and a 97-98 OID. The new notes sit pari passu with the borrower’s existing term loan, but in the event of a default, bondholders notably cannot seek any remedial action for 180 days.

Fleet management

Avis has a better cushion between its ABS rate and GAAP rate when compared to Hertz, meaning Avis’s used car fleet has more room to depreciate before requiring additional funding, two of the sources said.

Specifically, Avis’s overall ABS pool can sustain “substantially more” than a 6% decline in vehicle values before jeopardizing an ABS maintenance covenant, according to deal documents. In that case, the company could be required to make up the difference in cash and have more conditional access to the ABS market.

Meanwhile, Manheim Auctions disclosed that its benchmark used vehicle index already fell 11.8% in April from March, and 9.6% year-over-year.

As such, fleet reduction has become the centerpiece of liquidity management, with Avis aiming to reduce its fleet by 20% year-over-year by June, according to deal documents. The company has also cut an estimated USD 2bn in annualized costs – including furloughing 70% of its workforce and eliminating discretionary spending – and is looking to cut more.

Even so, the company is projecting a combined operational cash burn of USD 800m for April, May, and June. But that projected cash burn diminishes heading into the summer, with the forecast predicting Avis will be cash flow positive from July onward.

Drifting into 2021

After the new bond deal, Avis would have roughly USD 2.1bn in liquidity including USD 1.87bn of cash and USD 225m revolver availability. Leverage would be 5.7x through USD 4.014bn of debt—excluding ABS trusts—and USD 702m of LTM adjusted EBITDA as of 31 March.

Based on company estimates, Avis will have enough liquidity to withstand 2Q20’s expected cash burn. Two of the sources agreed with Avis’s cash burn projections, but noted they were highly contingent on when air travel resumes and the outcome of Hertz’s ABS negotiations.

Without a return to pre-pandemic travel habits, sources projected a similar cash burn in 3Q20 as well. Moody’s expects travel to remain weak through the end of 2020, while S&P expects passenger airline travel to recover in the second half of 2020 and continue improving through 2021.

“Revenues haven’t gone to zero because there are still some car rentals off airports but that’s not enough to carry them,” one of the sources said. “And who knows when travel will be back in full force.”

If Hertz were to file for bankruptcy, its clean balance sheet could give it a per-unit cost advantage over Avis, in turn prompting Avis to potentially file for bankruptcy as well, according to analysts at CreditSights. In contrast, a Hertz bankruptcy would give Avis an opportunity to seize the mantle of the number two car rental player – behind Enterprise, says the report, published yesterday.

For trading comparisons, Avis’s USD 1.2bn Libor+ 225bps term loan due 2027 was last quoted today in the 66/69.438 context for a spread to maturity of L+ 894bps. The loan was quoted in the 75.75/79.8 context last week, according to Markit.

Avis’s existing USD 375m 5.25% senior unsecured notes due 2025 last traded yesterday at 58 to yield 18.8%, compared to trades at 55 to yield 20% on 1 May, according to MarketAxess. Avis is rated B2/B at the senior unsecured level.

Hertz’s USD 700m L+ 275bps term loan due 2023 was last quoted today in the 62.771/65.896 context for a spread to maturity of L+ 2,034bps. That’s up from yesterday’s levels of 59.688/63.813, according to Markit.

Hertz’s USD 500m 7.125% senior unsecured notes due 2026 last traded yesterday at 14.125, down from trades in the 17-20 context last week.

Citi declined to comment. Avis did not respond to a request for comment.

2020 Debtwire