Investing.com -- Moody’s Ratings has confirmed the ratings of Avis Budget (NASDAQ: CAR ) Car Rental, LLC (Avis), including the Ba3 corporate family rating (CFR), Ba3-PD probability of default rating, and Ba1 backed senior secured bank credit facility rating. Similarly, the B1 backed senior unsecured rating of Avis and Avis Budget Finance plc has been affirmed. However, the outlook for the company has been adjusted from stable to negative, and the speculative grade liquidity rating has been downgraded to SGL-3 from SGL-2.

The affirmation of the ratings reflects Moody’s belief that Avis will continue to maintain its competitive position within the car rental industry in the US and Europe. This is expected to be facilitated by the company’s implementation of data-driven technology tools aimed at enhancing customer experience and operational efficiency.

The shift to a negative outlook is due to expectations of a prolonged recovery for Avis’ margin and balance sheet deleveraging. The company’s fleet rotation acceleration is predicted to decrease depreciation expense, but the full impact won’t be realized until late 2025. High interest expenses are expected to persist, funds available for debt reduction are likely limited, and rental rates are yet to stabilize.

The Ba3 corporate family rating is indicative of Avis’ strong competitive stance in the car rental market. Avis’ revenue is diversified across on-airport and off-airport operations, leisure and corporate travel, and by geography. The company’s strategic focus is on improving customer experience, operational efficiency, fleet discipline, and the use of technology to advance its service offerings and operations.

Despite the car rental market’s oligopolistic nature, it remains highly competitive and presents several challenges for Avis. These include the industry’s cyclical nature, imbalances between industry fleet levels and customer demand, a heavy reliance on capital markets to fund annual fleet purchases, and the need to adapt to an evolving transportation landscape.

Unfavorable conditions in the car rental market continue to weigh on earnings due to lower revenue per day, higher depreciation on more costly vehicles, and higher interest expense. An unexpected excess of vehicles in the industry has exacerbated the earnings pressure.

Avis is accelerating its fleet rotation for competitive reasons, which led to an asset impairment and other charges of $2.5 billion, primarily to reduce the rental fleet’s carrying value. Lower prices for new vehicle purchases and the ensuing lower depreciation are expected to help recover Avis’ pre-tax income margin in 2025 to 2.5%, from a pre-tax loss incurred in 2024. Debt/EBITDA is expected to remain high at about 4.5 times by the end of 2025.

Liquidity is anticipated to remain adequate, supported by a cash balance of at least $500 million and the proceeds from a new $500 million Term Loan A completed in February 2025. Available capacity under the $2 billion revolving credit facility is limited by a large amount of letters of credit that provide support to the company’s vehicle financing programs. Avis had only approximately $500 million of available borrowing capacity under the revolving credit facility as of December 31, 2024.

The ability of Avis to dispose used vehicles swiftly remains critical when demand wanes to raise proceeds that can be deployed for repayment of the company’s vehicle debt and other obligations.

Avis’ ratings could be upgraded if the company manages its assets efficiently while maintaining disciplined industry fleet capacity and capital allocation. Metrics that would reflect such performance include pre-tax income as a percent of sales of at least 10%, EBITA/average assets of around 10%, and debt/EBITDA below 3.25 times. Good liquidity is also a requirement for an upgrade.

The ratings could be downgraded if Avis is unable to manage fleet utilization consistently at approximately 70%, if revenue per vehicle per day drops significantly, if Avis’ ability to dispose vehicles becomes constrained, or if there is a steep drop in used vehicle prices. Metrics that would contribute to a rating downgrade include pre-tax income as a percent of sales of less than 7.5%, EBITA/average assets of less than 7%, or debt/EBITDA sustained above 4 times.

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