Rating Action: Moody’s assigns provisional ratings to Hertz Series 2022-1 and 2022-2 rental car ABSGlobal Credit Research – 07 Jan 2022New York, January 07, 2022 — Moody’s Investors Service (Moody’s) has assigned provisional ratings to the Series 2022-1 and Series 2022-2 Rental Car Asset Backed Notes to be issued by Hertz Vehicle Financing III LLC (the Issuer), Hertz’s rental car ABS facility.The Series 2022-1 Notes and the Series 2022-2 Notes will have a legal final maturity in 54 and 78 months, respectively. Hertz Vehicle Financing III LLC (HVFIII) is a Delaware limited liability company, which is a bankruptcy-remote special purpose entity (SPE) and direct subsidiary of The Hertz Corporation (Hertz). The collateral backing the notes is a fleet of vehicles and a single operating lease of the fleet to Hertz for use in its rental car business, as well as certain manufacturer and incentive rebate receivables owed to the SPE by the original equipment manufacturers (OEMs).The complete rating actions are as follows:Issuer: Hertz Vehicle Financing III LLCSeries 2022-1 Rental Car Asset Backed Notes, Class A, Assigned (P)Aaa (sf)Series 2022-1 Rental Car Asset Backed Notes, Class B, Assigned (P)A2 (sf)Series 2022-1 Rental Car Asset Backed Notes, Class C, Assigned (P)Baa2 (sf)Series 2022-1 Rental Car Asset Backed Notes, Class D, Assigned (P)Ba2 (sf)Series 2022-2 Rental Car Asset Backed Notes, Class A, Assigned (P)Aaa (sf)Series 2022-2 Rental Car Asset Backed Notes, Class B, Assigned (P)A2 (sf)Series 2022-2 Rental Car Asset Backed Notes, Class C, Assigned (P)Baa2 (sf)Series 2022-2 Rental Car Asset Backed Notes, Class D, Assigned (P)Ba2 (sf)RATINGS RATIONALEThe provisional ratings are based on (1) the credit quality of the collateral in the form of rental fleet vehicles, which Hertz uses in its rental car business, (2) the credit quality of Hertz, Corporate Family Rating of B2, as the primary lessee and as guarantor under the operating lease, (3) the experience and expertise of Hertz as sponsor and administrator, (4) the credit enhancement, which will consist of subordination and over-collateralization, (5) a required liquidity amount in the form of cash and/or a letter of credit, (6) the transaction’s legal structure, including standard bankruptcy remoteness and security interest provisions, and (7) vastly improved rental car market conditions, owing to the tight supply and increasing demand.The Series 2022-1 and Series 2022-2 Class A, Class B, and Class C Notes will benefit from subordination of 30.00%, 22.00%, and 13.00% of the outstanding balance of the Series 2022-1 and Series 2022-2 Notes, respectively. Additionally, the Series 2022-1 Notes and Series 2022-2 Notes will benefit from overcollateralization and a liquidity reserve to cover at least six months of interest on the notes, plus 50 basis points of expenses.As in prior issuances, the transaction documents stipulate that the required credit enhancement for the Series 2022-1 and Series 2022-2 Notes, sized as a percentage of the total assets, will be a blended rate, which is a function of Moody’s ratings on the vehicle manufacturers and defined asset categories as described below:» 5.00% for eligible program vehicle and receivable amount from investment grade manufacturers (any manufacturer that has Moody’s long-term rating or senior unsecured rating or long-term corporate family rating (together, relevant Moody’s ratings) of at least “Baa3” and any manufacturer that does not have a relevant Moody’s rating and has a senior unsecured debt rating from Moody’s of at least “Ba1”)» 8.00% for eligible program vehicle amount from non-investment grade manufacturers» 15.00% for eligible non-program vehicle amount from investment grade manufacturers» 15.00% for eligible non-program vehicle amount from non-investment grade manufacturers» 8.00% for eligible program receivable amount from non-investment grade (high) manufacturers (any manufacturer that (i) is not an investment grade manufacturer and (ii) has a relevant Moody’s rating of at least “Ba3”)» 100.00% for eligible program receivable amount from non-investment grade (low) manufacturers (any manufacturer that has a relevant Moody’s rating of less than “Ba3”)» 35.0% for medium-duty truck amount» 0.00% for cash amount» 100% for remainder Aaa amountConsequently, the actual required amount of credit enhancement will fluctuate based on the mix of vehicles and receivables in the securitized fleet. Furthermore, the transaction documents dictate that the total enhancement should include a minimum portion which is liquid (in cash and/or letter of credit), sized as a percentage of the aggregate Class A / B / C / D principal amount, net of cash.Below are the assumptions Moody’s applied in the analysis of this transaction:Risk of sponsor default: Moody’s assumed a 60% decrease in the probability of default (from Moody’s idealized default probability tables) implied by the B2 rating of the sponsor. This reflects Moody’s view that, in the event of a bankruptcy, Hertz would be more likely to reorganize under a Chapter 11 bankruptcy filing, as it would likely realize more value as an ongoing business concern than it would if it were to liquidate its assets under a Chapter 7 filing. Furthermore, given the sponsor’s competitive position within the industry and the size of its securitized fleet relative to its overall fleet, the sponsor is likely to affirm its lease payment obligations in order to retain the use of the fleet and stay in business. We arrive at the 60% decrease assuming a 80% probability Hertz would reorganize under a Chapter 11 bankruptcy and a 75% probability Hertz would affirm its lease payment obligations in the event of Chapter 11.Disposal value of the fleet: Moody’s assumed the following haircuts to the net book value (NBV) of the vehicle fleet:Non-Program Haircut upon Sponsor Default (Car): Mean: 19%Non-Program Haircut upon Sponsor Default (Car): Standard Deviation: 6%Non-Program Haircut upon Sponsor Default (Truck): Mean: 35%Non-Program Haircut upon Sponsor Default (Truck): Standard Deviation: 8%Non-Program Haircut upon Sponsor Default (Tesla): Mean: 24%Non-Program Haircut upon Sponsor Default (Tesla): Standard Deviation: 10%Fixed Program Haircut upon Sponsor Default: 10%Additional Fixed Non-Program Haircut upon Manufacturer Default (Car): 20%Additional Fixed Non-Program Haircut upon Manufacturer Default (Truck): 10%Additional Fixed Non-Program Haircut upon Manufacturer Default (Tesla): 50%Fleet composition — Moody’s assumed the following fleet composition (based on NBV of vehicle fleet):Non-program Vehicles: 95%Program Vehicles: 5%Non-program Manufacturer Concentration (percentage, number of manufacturers, assumed rating): Aa/A Profile: 10.0%, 2, A3 Baa Profile: 55.0%, 2, Baa3 Ba/B Profile: 35.0%, 2, Ba3 Program Manufacturer Concentration (percentage, number of manufacturers, assumed rating): Aa/A Profile: 0.0%, 0, A3 Baa Profile: 50.0%, 1, Baa3 Ba/B Profile: 50.0%, 1, Ba3 Manufacturer Receivables: 10%; receivables distributed in the same proportion as the program fleet (Program Manufacturer Concentration and Manufacturer Receivables together should add up to 100%)Correlation: Moody’s applied the following correlation assumptions:Correlation among the sponsor and the vehicle manufacturers: 10%Correlation among all vehicle manufacturers: 25%Default risk horizon — Moody’s assumed the following default risk horizon: Sponsor: 5 years Manufacturers: 1 year A fixed set of time horizon assumptions, regardless of the remaining term of the transaction, is used when considering sponsor and manufacturer default probabilities and the expected loss of the related liabilities, which simplifies Moody’s modeling approach using a standard set of benchmark horizons.Detailed application of the assumptions are provided in the methodology.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was “Rental Vehicle Securitizations Methodology” published in October 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1295602. Alternatively, please see the Rating Metho
dologies page on www.moodys.com for a copy of this methodology.Factors that would lead to an upgrade or downgrade of the ratings:UpMoody’s could upgrade the ratings of the Series 2022-1 and 2022-2 Notes if (1) the credit quality of the lessee improves, (2) assumptions of the credit quality of the pool of vehicles collateralizing the transaction were to improve, as reflected by a stronger mix of program and non-program vehicles and stronger credit quality of vehicle manufacturers, (3) the residual values of the non-program vehicles collateralizing the transaction were to increase materially relative to Moody’s expectations.DownMoody’s could downgrade the ratings of the Series 2022-1 and 2022-2 Notes if (1) the credit quality of the lessee deteriorates or a corporate liquidation of the lessee were to occur and introduce operational complexity in the liquidation of the fleet, (2) assumptions of the credit quality of the pool of vehicles collateralizing the transaction were to weaken, as reflected by a weaker mix of program and non-program vehicles and weaker credit quality of vehicle manufacturers, (3) reduced demand for used vehicles results in lower sales volumes and sharp declines in used vehicle prices above Moody’s assumed depreciation, or (3) the residual values of the non-program vehicles collateralizing the transaction were to decrease materially relative to Moody’s expectations.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.In rating this transaction, Moody’s CDOROM(TM) is used to model the expected loss for each tranche. Moody’s CDOROM(TM) is a Monte Carlo simulation tool which takes each underlying asset default probability as input. Each underlying asset default behavior is then modeled individually with a standard multi-factor model incorporating both intra- and inter-industry correlation. The correlation structure is based on a Gaussian copula. Each Monte Carlo scenario simulates defaults and if applicable, recovery rates, to derive losses on a portfolio. For a synthetic transaction, the model then allocates losses to the tranches in reverse order of priority to derive the loss on the tranches. By repeating this process and averaging over the number of simulations, Moody’s can derive the expected loss on the tranches. For a cash transaction, the portfolio loss, or default, distribution produced by Moody’s CDOROM(TM) may be input into a separate cash flow model in accordance with its priority of payment to determine each tranche’s expected loss.Moody’s quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody’s weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Mason Riley Associate Lead Analyst Structured Finance Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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