Avis on road to recovery, but tailwinds persist

Avis Budget is on the path to generate free cash flow in 2021, as the rental car market and travel industry looks to bounce back, according to three sources following the situation. However, the industry faces multiple constraints such as a tight fleet supply, a semiconductor shortage and a surge of the Delta variant, the sources added.

Avis is having a hard time keeping up with demand after selling off its fleet to safeguard its liquidity coffers. And in 2020, the borrower specifically implemented more than USD 2.5bn in cost reductions, which was vital to its survival amidst the pandemic, the sources said. That helped the company remain solvent when other peers such as Hertz filed for Chapter 11 protection.

Major car rental operators sold off more than 770,000 cars last year to counteract suppressed demand from the pandemic and fewer travelers, according to media reports. The depletion left the market with less than two of every three rental cars in service before the pandemic.

But now, car rental companies can’t rebuild their fleet fast enough, resulting in scarcity of supply and surging rental prices.

In its 1Q21 earnings call, the company highlighted the increase in demand, especially on the domestic side and acknowledged that building up the fleet will be a fluid process of working with the OEMs during a semiconductor shortage. The company also said that they are focused on keeping costs efficient.

Earnings-wise, revenue for 1Q21 totaled USD 1.372bn, compared to USD 1.753bn in 1Q20 as revenue for January 2021 suffered since there were no major holidays such as Thanksgiving or Christmas. Adjusted EBITDA totaled USD 47m in the quarter, compared to negative USD 87m in 1Q20. On an LTM basis through 1Q, adjusted EBITDA totaled negative USD 41m.

“March started to see the convergence of pent-up demand, tight fleet and stronger pricing. It was sudden and with a velocity across the US. Seemingly overnight, we had a transition from defense to offense,” Avis CEO and President Joe Ferraro said on the call.

Avis executives also pointed out that the momentum in the second half of 1Q21 carried over at least to the first half of 2Q21 in rental day demand and revenue per day. The company added that the international segment’s uptick may take longer to arrive compared to the domestic front as cross-border travel returns.

For 2021, revenue is projected to come in at roughly USD 8.3bn, said an additional source. That compares to USD 5.402bn in 2020 and USD 9.172bn in 2019, according to SEC documents. Investors are looking to 2019 as a more normalized comparison, given the pandemic distorted comps for 2020.

Adjusted EBITDA for 2021 is estimated at a USD 916m to USD 1.6bn range, the sources added. For comparison, the company recorded negative USD 175m of adjusted EBITDA in 2020 and positive USD 777m in 2019.

For 2021, the issuer could throw off USD 898m of free cash flow, based on the midpoint of USD 1.258bn in EBITDA projections, USD 160m in capex and USD 200m of interest expense, said the sources.

For 2022, the company is expected to generate USD 540m of cash through USD 950m of adjusted EBITDA less USD 210m of capex,  less USD 200m of interest expense, they said. This compares to 360m of free cash flow generated in 2019 through USD 788m of adjusted EBITDA, less USD 250m of capital expenditures, less USD 178m of interest expense.

As of 31 March, the company’s liquidity stood at USD 1.176bn through USD 576m of cash and roughly USD 600m of revolver availability.

Avis’s near-term recovery will depend on how efficiently they are able to keep with demand and restock inventory, the sources said. Also adding to the mix is how Avis navigates the semiconductor shortage that diminished auto production, making the pool for restocking much smaller.

“You can get a flight, but not necessarily a rental car, at least not at the rates you could before the pandemic,” one of the sources said.

Still, there are multiple threats for the industry that could cap growth, said the sources. Competition from rideshare companies and the development of autonomous vehicles could be hurdles in the long term.

Pre-pandemic, the rental car space faced competition from rideshare companies such as Uber and Lyft and the insurgence of autonomous vehicles. However, currently, there are not enough drivers to match the demand for rideshare vehicles.

Many app-based drivers across the nation even went on strike last Wednesday (21 July) to demand better working conditions and more pay and legal protections, according to media reports.

Meanwhile, many car manufacturers such as GMFordTeslaPorsche and Volkswagen are forging ahead with their plans for self-driving vehicles. GM and Ford are in a fight over branding for their self-driving cars, while Porsche this week unveiled an interior for its version.

Avis may also see increased competition as peer Hertz emerges with a cleaner balance sheet, said one of the sources. Post-emergence, by 2023, Hertz is expected to be 1.6x levered through USD 1.3bn of total debt and a projected USD 800m of adjusted EBITDA, as reported by Debtwire. Meanwhile, exit liquidity stands at USD 1.562bn through USD 592m of cash and USD 970m of revolver availability.

Hertz’s new USD 1.3bn Libor+350bps term loan due 2028 is quoted in the 99.583/99.938 context, down slightly from quotes at 99.979/100.271 in mid-July, according to Markit.

Avis’s USD 500m 4.75% senior unsecured notes due 2028 traded yesterday (27 July) at 101.55 to yield 4.378%, compared to trades at 102.5 to yield 4.161% in early July, according to MarketAxess.

The USD 600m 5.375% senior unsecured notes due 2029 traded yesterday (27 July) at 104.375 to yield 4.313%, compared to trades at 103.1 to yield 4.619% on 20 July, but in line with levels from early July.

The company’s stock is trading today at USD 81.56 per share and a market cap of USD 5.698bn, up 1.75% from yesterday’s close.

Messages left with the company were not returned.

2021 Debtwire

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