Hertz's buy of Dollar Thrifty may slow its investment-grade status change
BY Staff and Wire Reports
Thursday, August 30, 2012
8/30/12 at 2:36 AM
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Hertz Global Holdings Inc.'s $2.6 billion purchase of Tulsa-based Dollar Thrifty Automotive Group Inc. will increase Hertz's total debt by as much as 28 percent.
That could delay the junk-rated company's long-sought ascent to investment-grade status, analysts say.
Hertz obtained $1.95 billion in financing to support its buyout and will assume $1.6 billion in Dollar Thrifty's obligations. Park Ridge, N.J.-based Hertz's credit-default swaps, which rise as confidence in a borrower's creditworthiness diminishes, increased 6.6 basis points Tuesday, according to data provider CMA, which is owned by McGraw-Hill Cos.
Hertz CEO Mark Frissora said on a conference call this week that achieving an investment-grade rating was still the company's "ultimate goal," even as the acquisition boosts its debt to four times earnings before interest, taxes, depreciation and amortization.
Standard & Poor's placed its B+ rating for Hertz on watch for a possible reduction, citing the rise in debt at the second-most-leveraged auto-rental company
"The acquisition is a positive for the business profile, but they're adding a lot of debt and we need to see what it does to the financial profile," Betsy Snyder, an analyst at S&P, told Bloomberg News.
Moody's Investors Service gives Hertz a B1 corporate rating, four levels below investment grade.
A lower debt rating after the merger conceivably could have an impact on the ease and expense involved in Hertz obtaining more funding for possible expansion, another stated goal.
"Hertz is buying Dollar Thrifty as a platform for growth," Scott Thompson, Dollar Thrifty's CEO, said Tuesday.
Thompson noted that Hertz expects to see $160 million annually in combined cost savings and sales growth.
"A good deal of that probably will come from fleet utilization and procurement," Thompson said.
Dollar Thrifty, which employs 780 people in Tulsa, also could see staff cuts. Workforce decisions will be made later, after the deal closes and an efficiency study of the two companies is completed, executives said.
If there is a downgrade of Hertz, it "would be limited to one notch," S&P's Snyder wrote in a report, adding that this was Hertz's third and most expensive attempt to buy Dollar Thrifty.
Hertz's total debt-to-gross earnings will increase to four times after the acquisition from 3.6 times as of June 30, according to an Aug. 27 investor presentation. That puts the company's leverage second only among its peers to the 4.6 times of Avis Budget Group Inc., Bloomberg data show.
Hertz reported a 7.4 percent increase in revenue during the second quarter, to $2.23 billion from $2.07 billion in the comparable year-ago period. Net income was $92.9 million, compared with $60.1 million a year earlier, and total debt was $12.5 billion.
Hertz began its pursuit of Dollar Thrifty in April 2007. It made a formal bid in 2010 of about $1.2 billion, which Dollar Thrifty shareholders rejected. Hertz made another offer last year that it later withdrew, citing market conditions.
Barclays Plc, Bank of America Corp. and Deutsche Bank AG are providing a $1.95 billion bridge financing to Hertz, according to a commitment letter filed with the Securities and Exchange Commission. Bridge facilities are short-term loans that usually mature in one year and are often used as backstops to bond offerings or longer-dated bank debt.
Hertz may sell about $1.45 billion in bonds and add as much as $500 million to an existing loan, according to a Bloomberg report.
Still, so much debt is likely to be felt by Hertz, at least for a while, analysts said.
"Hertz is focused on achieving credit ratios consistent with an investment-grade rating," Evan Mann, an analyst at debt research firm GimmeCredit LLC, wrote in a July 31 report. An "acquisition of Dollar Thrifty could cause the company to revisit or delay its investment-grade aspirations."
Original Print Headline: Deal to send Hertz debt soaring
The Tulsa World Business staff contributed to this story by Bloomberg News.