Avis Budget placed on negative watch by S&P as demand slumps

S&P on Tuesday said it expected the company, one of the largest global on-airport rental firms, to cut the size of its fleet through lower vehicle purchases and selling more cars off.

“The sharp decline in air travel due to the coronavirus pandemic will hurt demand for car rentals at airports, the largest part of Avis Budget's business,” S&P said in a statement. “As a result, we expect Avis Budget's operating results to materially weaken from our prior assumptions.”

S&P said the pandemic and government actions to combat it would hurt economic activity, an effect likely to linger after cases of the virus decline.

It said that car rental firms had some flexibility to respond to sharp demand shocks, citing the 2001 terror attacks in the US where the industry was able to downsize its fleet by around 20% by returning cars to the auto manufacturers under pre-arranged agreements.

“However, most of Avis Budget's vehicles today are not covered under these agreements, which could cause oversupply and thus pressure on used car prices,” S&P said. Capital expenditure could also be cut by keeping cars for longer periods.

Avis should also be able to refinance loans due for maturity through asset-backed fleet financings, it added.

“We will be watching how Avis Budget reduces its fleet to meet lower demand and refinances its maturities to have a better idea of how it responds to the current situation. We expect to resolve the CreditWatch as we learn more about the severity of the coronavirus impact and timing of the recovery on Avis Budget's financial position.”