With notes set to expire in just four years, Avis Budget Car Rental is sponsoring a $250 million asset-backed securities (ABS) transaction secured by a unique lease on a fleet of vehicles that Avis Budget Group uses in its car rental business.
AESOP Leasing and AESOP Leasing Corp are the special purpose entities that hold the leases, according to a pre-sale report from Moody’s Investors Service. Avis Budget Rental Car Funding (AESOP), Series 2022-3, will repay the Notes from revenue generated from a combination of Avis Budget Car Rental lease payments, vehicle sales and refinance proceeds.
JP Morgan Securities is part of a core underwriter group that includes BofA Securities, BNP Paribas, RBC Capital Markets and Truist Securities, Moody’s said. The bonds will be issued from a subordinated senior capital structure and “dynamic” credit enhancement in the form of overcollateralisation and a liquidity reserve, which Moody’s considers credit strength.
In one aspect of credit enhancement, analysts say the level of credit enhancement will change with the composition of the fleet. An increase in non-program vehicle leases or the proportion of program vehicles coming from lower quality leases will increase credit improvement, analysts note. Dynamic credit enhancement buckets for Series 2022-3 notes are higher than those for Series 2022-1, Moody’s said.
The terms of the agreement require a level of credit enhancement of 5.6% for vehicles in the program and 9.1% for all other vehicles in the program, for eligible manufacturers rated at least Baa3, Moody’s said. .
Moody’s plans to assign ratings to four categories of notes, ranging from “Aaa” on the $178 million Class A notes to “Ba2” on the $30 million Class D notes.
While credit enhancement is certainly a plus, the primary form of transaction credit enhancement is overcollateralization, driven by the vehicles themselves. Typically, the used car wholesale market can support sales of around 40 million vehicles per year. The current shortage of semiconductor chips is delaying the manufacture and delivery of new cars, however, maintaining record prices for used cars available for sale, the rating agency said.
The deal does, however, have a number of credit issues, primarily involving a lack of wider vehicle diversity in its fleet. The rental fleet is concentrated with just a few manufacturers. In addition, residual values from a bankrupt manufacturer would decline significantly, Moody’s said.
Additionally, AESOP 2022-3, the trust will be able to add more Tesla electric vehicles to its fleet over time, thanks to a 15% warranty pool concentration limit. Moody’s cites uncertainty around the residual value of Tesla electric vehicles.
The bonds have an expected final payment date in February 2026, with a final legal maturity in February 2027.