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 reflect the guarantee from Enterprise and as a result are equalized with the ratings of the Company.
KEY RATING CONSIDERATIONS
The Company’s ratings consider its leading vehicle rental franchise supported by significant home-city and global on-airport businesses, along with a highly seasoned management team with deep industry knowledge. Enterprise’s strong and resilient earnings generation is underpinned by its significant scale of operations and leading insurance replacement business that typically generates more stable revenues than on-airport revenues which are more cyclical and seasonal. Additionally, the Company’s strong bottom line reflects its high variable cost structure. Other credit fundamentals are strong including Enterprise’s well-managed risk position, sound funding and liquidity profiles, and robust capital position. Finally, the Stable trend reflects our view that the Company’s credit fundamentals will remain solid over the near term, despite the evolving economic headwinds.
A sustained increase in earnings or improved international revenue diversification, while maintaining strong credit fundamentals, would lead to an upgrade of the ratings. 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.
Enterprise maintains a strong and well-established home-city franchise in the U.S. that is underpinned by a leading insurance replacement business as well as a top-tier global on-airport vehicle rental business. The Company has a significant scale of operations including 1.5 million rental vehicles and approximately 9,400 global business locations, as well as tremendous brand recognition with its highly distinct rental car brands, including National Car Rental, Enterprise Rent-A-Car, and Alamo Rent A Car. Additionally, Enterprise operates a more moderately sized truck rental business, which has evidenced solid growth over recent years.
Earnings generation capacity remains durable reflecting strong airline passenger volumes, solid demand for home city business related vehicles, and high gains on vehicle sales upon disposition. For the six month period ending January 31, 2023 (1H FY23), Enterprise reported strong earnings growth year-on-year, as revenue growth considerably outpaced expense growth. Specifically, revenues generated by the Company’s global airport business reflected solid growth in both the leisure and commercial sub-segments, while its home city business reflected good revenue growth in its insurance replacement, and commercial sub-segments. Meanwhile, higher vehicle disposition gains, which were due to an increase in the number of vehicles sold, drove down vehicle expenses. We note that the Company maintains a variable expense base that is geared by its strong fleet management capabilities, which allows Enterprise the opportunity to rapidly reduce fleet levels to meet a sudden decline in demand, and subsequently rebuild fleet levels when demand improves. With mounting economic headwinds and still strong, but softening used car prices, we anticipate some pressure on future earnings.
Other credit fundamentals remain sound. Residual value risk is moderate, reflecting Enterprise’s strong fleet management capabilities, conservative depreciation policy levels, and the still strong used vehicle markets. Operational risk remains well-contained even with Enterprise’s large technology driven operating platform, including fleet management and reservation systems. Meanwhile, funding and liquidity are ample and well-managed. Funding is comprised of unsecured financing that is diversified by source and currency, and debt maturities are well spaced out over future years. Liquidity consists of cash and substantial availability under the Company’s committed credit facilities, augmented by Enterprise’s strong cash flows from operations. Finally, capitalization is ample, reflecting resilient earnings generation capacity, and its sound risk position. The Company’s cash flow leverage (Debt/EBITDA) is modest and supportive of the ratings.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factors that had a significant or relevant effect on the credit analysis.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022)
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions: https://www.dbrsmorningstar.com/research/402314/global-methodology-for-rating-non-bank-financial-institutions. (September 2, 2022). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings: https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.
The following methodologies have also been applied.
• DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023): https://www.dbrsmorningstar.com/research/411694/dbrs-morningstar-global-criteria-guarantees-and-other-forms-of-support
• DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023): https://www.dbrsmorningstar.com/research/410196/dbrs-morningstar-global-criteria-commercial-paper-liquidity-support-for-nonbank-issuers
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
The primary sources of information used for this rating include Morningstar Inc. and Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.
The rating was initiated at the request of the rated entity. The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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.
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