DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Enterprise Holdings, Inc. (Enterprise or the Company) and its related entity ERAC Canada Finance Company, including its Long-Term Issuer Rating of ‘A’. The trend for all ratings is Stable. The Company’s Intrinsic Assessment (IA) is ‘A’, while its Support Assessment is SA3, resulting in Enterprise’s final ratings being equal with its IA. ERAC Canada Finance Company’s ratings are guaranteed by Enterprise and are also equalized.
KEY RATING CONSIDERATIONS
The ratings reflect Enterprise’s strong car rental franchise underpinned by its leading home-city and global on-airport businesses, as well as its seasoned management team with deep industry knowledge. Revenues and earnings generation are strong and resilient, in part reflecting its large insurance replacement business that typically produces more stable revenues than on-airport revenues which are more impacted by cyclicality and seasonality, as well as the Company’s variable cost structure. While strong and resilient, the ratings are constrained by the monoline nature of the business model. Meanwhile, Enterprise maintains strong balance sheet fundamentals, including a soundly-managed risk position, solid funding and liquidity profile, and ample capital.
The Stable trend reflects our view that Enterprise’s credit fundamentals will remain solid over the near term, given sustained normalizing travel patterns and low unemployment despite inflationary pressures.
A sustained increase in earnings while maintaining strong credit fundamentals, or improved international revenue diversification, would lead to an upgrade. Conversely, a weakening market position, particularly in the Company’s home-city business, missteps in fleet management leading to prolonged pressure on earnings, or a significant increase in leverage, would lead to a downgrade of the ratings.
Overall, Enterprise operates a leading global car rental franchise, underpinned by a sound business model, a highly seasoned management team, and a strong operating and technology platform. The Company maintains a leading global on-airport franchise, along with a deeply rooted home-city franchise in the U.S. that includes a strong insurance replacement business. As of January 31, 2022, Enterprise had over 1.4 million vehicles, and 10,100 global locations, of which approximately 72% are Company-owned with the remainder franchised. Enterprise has tremendous brand recognition with its highly distinguishable rental car brands, including Enterprise Rent-A-Car, National Car Rental and Alamo Rent A Car. The Company also operates a moderately sized truck rental business, which has evidenced solid growth over recent years.
Enterprise’s earnings are resilient, reflecting a strong track record of annual earnings generation across multiple business and economic cycles. Since the trough of the Coronavirus Disease (COVID-19) pandemic, the Company’s earnings have rapidly improved, reflecting sustained normalizing travel patterns and the strong used vehicle markets. The Company’s well run home-city franchise, underpinned by its large insurance replacement business, produces the majority of its revenues. Meanwhile expenses are highly variable and typically move in parallel with revenue generation. In the first half of fiscal year 2022 (ending January 31, 2022), the Company’s earnings significantly improved year-on-year (YoY), driven by strong revenue growth, partially offset by higher expenses. Higher revenues reflected increasing rental demand due to strengthening air passenger volumes. Meanwhile, higher expenses were driven by an increase in vehicle costs, along with higher levels of direct operating expense, and selling, general and administrative costs. The increase in vehicle expense reflected a larger average fleet and higher average cost per vehicle, along with lower offsetting gains on vehicle disposals due to a decline in the number of vehicles sold YoY. Of note, for the car rental sector, including Enterprise, the acquisition cost of vehicles and operating expenses including labor costs are inflation sensitive. Going forward, higher inflationary induced costs may be offset by the sector’s ability to raise prices, as well as a continuation of solid margins upon vehicle disposition due to the solid used vehicle markets.
Balance sheet fundamentals remain strong. The Company’s risk profile is sound and is appropriately managed, underpinned by strong fleet management capabilities, that are beneficial in mitigating residual value risk. Operational risk remains well-managed despite its large technology driven operating platform, consisting of reservations and fleet management systems. Meanwhile, the Company’s funding and liquidity positions are sound and well-managed with funding primarily composed of unsecured financing that is diversified by source and currency, while debt maturities are well spaced out over future years. Given its high level of unencumbered assets, Enterprise has significant financial flexibility, especially during stressful periods. Liquidity is sound and well-managed, comprised of cash and substantial availability under its credit facilities. Liquidity also reflects the Company’s strong cash flows from operations. Finally, we view Enterprise’s capital to be ample, given its sound risk profile, resilient earnings generation capacity, and low leverage (Debt/EBITDA). Importantly, the Company’s owners continue to demonstrate sound capital management control, maintaining solid capital retention during periods of stress and acquisitions.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (September 2, 2021): https://www.dbrsmorningstar.com/research/383936/global-methodology-for-rating-non-bank-financial-institutions. Other applicable methodologies include the DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022): https://www.dbrsmorningstar.com/research/394683/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support, DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 1, 2022): https://www.dbrsmorningstar.com/research/393065/dbrs-morningstar-criteria-commercial-paper-liquidity-support-for-nonbank-issuers, and DBRS Morningstar Criteria – Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
The primary sources of information used for this rating include Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277