Avis Budget Group Buckling Under Debt

Avis Budget Group warned on Nov. 7 that it might be unable to comply with financial covenants contained in its principal corporate credit facility, due to slowing demand for vehicle rental services and increases in borrowing costs associated with fleet financing. Avis' car and truck rental businesses require substantial capital, as the company discussed in its third-quarter 2008 FORM 10-Q filing:

• "We expect our cost of borrowing under our two asset-backed rental car conduit facilities to increase approximately 3% per annum as a result of amendments to such facilities we entered into in October 2008. In connection with such amendments, we obtained a 60-day extension for the 364-day facility that matured in October 2008 while we continue to work with the lenders under that facility on a longer-term extension. There can be no assurance that we will be able to obtain such longer-term extension or an extension for our other asset-backed rental car conduit facility, which matures in February 2009."

• "Due to reduced demand for travel services, rising borrowing costs and other factors, we may be unable to generate sufficient earnings to enable us to satisfy the financial covenants contained in our senior credit facilities. Failure to comply with these covenants would cause a default under such facilities. If such a default were to occur, there can be no assurance that we would be able to refinance or obtain a replacement for such facilities on reasonable terms."

Although the company is carrying $12.4 billion in assets on the books, about 64 percent is in vehicles. Raising cash through fleet sales could prove to be difficult. Chief Operating Officer Bob Salerno told analysts on the third-quarter earnings call demand for used vehicles has slowed as both dealers and consumers were getting squeezed by credit availability. He remained cautious on the outlook for the used car market, expecting it to stay soft until dealers' [and customers'] access to credit improves.

In the trailing twelve-months, the company generated about three times more income (before interest expense, taxes, depreciation, and amortization) than the $124 million in borrowing costs. Avis generates about 81 percent of domestic car rental revenue from corporate-owned on-airport locations. In coming months, overcapacity in the rental industry, combined with an overall reduction in business and leisure air travel, suggest the liquidity outlook for Avis could go from bad to worse.