NEW YORK-- Fitch Ratings has lowered the senior debt rating of Hertz Corp. and its subsidiaries to BBB from BBB+.
Along with this action, Fitch placed Hertz's senior debt and F2 commercial paper ratings on Rating Watch Evolving. The Rating Watch Evolving status indicates that Hertz's ratings could be raised, lowered, or remain the same following Fitch's review of an expected transaction. These actions cover approximately $8.5 billion of debt securities, as of March 31.
The lowering of the long-term rating was driven by the lowering of Ford Motor Co.'s rating, which Fitch also announced in May. The decision to place Hertz's ratings on Rating Watch Evolving highlights the potential for Fitch to delink Hertz's ratings from those of Ford. This reflects Ford's announcement on April 20 of its intention to pursue strategic options, including a sale of Hertz, Fitch said in a statement.
If a sale were to occur, Fitch's review of Hertz would also include an analysis of the business and its strategic plans for the company. The Evolving status confirms Fitch's view that Hertz has a reasonable opportunity to establish itself as an independent company with a risk profile warranting higher ratings than those now assigned.
"This would be consistent with Fitch's previous commentary on Hertz where we have stated that we viewed it as a mild positive to Ford's rating," Fitch said in the statement. "However, until the final structure of the company is established, there remains a probability that the key financial elements of the company could be changed, such as the leverage profile, which could lead to a lowering of the ratings."
After Hertz reported record net income of $365 million for 2004, Hertz maintained its operating momentum for the first quarter of 2005. Hertz's net income for the three-month period ending March 31, 2005 was $20 million versus a $3 million loss for the same period in 2004. Improved pre-tax operating results at the company's core car rental and equipment rental units drove the swing to profitability in the 2005 period.
"Fitch believes that the favorable economic outlooks for travel and non-residential construction for the remainder of 2005 bodes well for Hertz and should lead to another strong year of operating results," Fitch said. "Hertz's capitalization and leverage have evolved into rating strengths over the last five years as internal capital formation has exceeded asset growth."
On March 31, leverage -- defined as total on-balance sheet debt divided by tangible equity -- rose to 4.06 times (x) from 3.96x at Dec. 31, 2004. Hertz's leverage rises during the spring and summer, as the company fleets up for peak season.
In its quarterly report released at the end of March, Hertz said it would begin paying a common dividend to Ford beginning June 30. Hertz's dividend will help maintain its financial leverage, as defined by the company, at 3.50x or lower.
Fitch said it does not expect Hertz's year-end capitalization and leverage metrics to significantly improve in future periods.