Why Avis won't go bankrupt like Hertz
It’s amazing how quickly the conversation around Avis has changed over the last few months. In April, investors worried that Avis would follow Hertz, its car rental rival, into bankruptcy by the end of 2020. But Avis’s performance in the second quarter and its recent success in the ABS market suggest it is in a much better position than its competitors to weather the recession.
The US transport securitization industry has been through its toughest ever period in the second quarter, as air travel came to a screeching halt.
Hertz has been one of the biggest casualties. It filed for Chapter 11 bankruptcy in May and eventually reached agreement with ABS investors to pay a discounted rent payment, while liquidating part of its fleet.
Avis also suffered: its revenues plummeted 67% year on year, resulting in a net loss of $481m.
However, investors say that unlike Hertz, Avis made all the right choices to pull itself out of the depths of the pandemic between March and May.
The company took immediate action, cutting 26% of its fleet by June, disposing of over 100,000 vehicles and cancelling more than 185,000 car orders internationally. The company did this at the perfect time, too, selling vehicles while used car prices rebounded in May.
On top of that, Avis also cut 60% of its pre-pandemic workforce, reduced executive pay and eliminated all non-essential spending. This series of quick, strict actions saved the company $320m from cash burn for the second quarter. That will give it a fatter cushion to fall back on in the very likely event that Covid-19 continues to disrupt the travel industry through 2020 and beyond.
Companies like Avis and Hertz rely heavily on their ability to finance through the securitization market. Avis has been able to issue high yield bonds twice since May, and in August it returned to the ABS market, to tank up on liquidity.
Hertz has been unable to issue any ABS or bonds this year.
On August 5, Avis priced the class ‘A’ notes of a securitization at 175bp over swaps, the ‘B’ notes at 270bp and ‘C’ notes at 400bp, all much tighter than initial price thoughts.
It was a “blockbuster deal”, according to several investors who participated, and showed how the market now appreciates the difference between Hertz and Avis. Moody’s provided the only rating, unlike past deals which have also had grades from S&P and DBRS Morningstar. But this does not appear to have been a problem for investors.
It is not going to be easy for Avis to keep afloat and the recovery will be painfully slow. But thanks to its decisive actions at the onset of Covid-19, Avis is now in a much better position than its competitors to get through the pandemic until travel demand returns.