Approximately $150 million asset backed securities affected
New York, November 29, 2012 -- Moody's Investors Service has assigned the definitive rating of Baa2(sf) to the $150,000,000 fixed rate Series 2012-2 Rental Truck Asset Backed Notes (the Notes) issued by Centre Point Funding, LLC (the Issuer). Avis Budget Car Rental, LLC (ABCR), a subsidiary of Avis Budget Group, Inc.(Avis, B1 stable), is the owner and operator of Budget Rent A Car System, Inc. (Budget). Through Budget, ABCR indirectly wholly-owns the Issuer and Budget Truck Rental, LLC (BTR). BTR is the lessee of vehicles from the Issuer under an operating lease and the administrator of the Issuer. As further described below, the rating is primarily based on (1) collateral in the form trucks owned by the Issuer and leased to BTR for BTR's truck rental operations (about 17,884 trucks representing over 73.7% of BTR's total rental truck fleet as of July 31, 2012), (2) the presence of ABCR as guarantor of BTR's obligations as lessee under an operating lease with the Issuer, as lessor, (3) minimum liquidity in the form of cash or letters of credit, (4) the legal structure and (5) the capabilities and the expertise of ABCR and BTR.
The complete rating action is as follows:
Issuer: Centre Point Funding, LLC, Series 2012-2
Series 2012-2 2.61%, Assigned Baa2(sf)
The Notes are principally secured by a first priority perfected security interest in a discrete portion of the trucks owned by the Issuer. The Issuer purchased the trucks with proceeds from the Issuer's various note issuances and/or capital contributions by Budget. Under an operating lease, the Issuer (as lessor), leases its trucks to BTR (as lessee). BTR may in the future sublease the trucks to certain of its affiliates but will always remain fully liable under the lease. BTR, as lessee, is responsible for lease payments covering, among other things, interest on the Notes and depreciation on the trucks. These obligations are guaranteed by ABCR.
For Series 2012-2, the total enhancement (trucks, cash and/or letter of credit) is initially 73.14% of the principal amount of the notes outstanding and will decline over time based on truck mix and aging. There is also a total enhancement floor of $15 million (or, if less, the principal amount of the notes outstanding) to address over concentration risk when the pool winds down at the later life of the transaction. Included in the enhancement is liquidity enhancement (cash and/or letter of credit) initially not less than 19% of the principal amount of the notes outstanding and will decline over time (but will not, at any time, be less than 10% of the principal amount of the notes outstanding) with a liquidity floor of $3.2 million. BTR, as lessee, is required to either purchase (at its option), or to use commercially reasonable efforts to otherwise dispose of, the securitized trucks once they reach a certain age (96 months for gas trucks and 120 months for diesel trucks from the time of invoice). As such, if BTR, as lessee, and ABCR, as guarantor, do not default on their respective obligations, the Notes are expected to be paid off in full from the scheduled truck disposition proceeds and the monthly depreciation payment (in the form of lease payments) by month 93, the expected final maturity date.
Truck disposition proceeds are to be applied to pay down the Notes to the extent necessary to make sure that the total required credit enhancement remains in formula. If the transaction is not in an amortization event, any excess proceeds on any payment date before the 72nd month of the transaction, will be released to the Issuer to buy new trucks, refinance its other outstanding series of notes or released to Budget. The rapid amortization period starts with the payment date in month 72 if the transaction has not hit an amortization event, when all truck disposition proceeds, monthly depreciation payments and other principal collections, after the Issuer's expenses, will be applied to reduce Note principal until the Notes are fully paid. In addition, under the transaction documentation, the indenture trustee will be automatically directed to carry out a limited forced liquidation of trucks to generate enough disposition proceeds to pay-off the bondholders at par if the bonds have not been fully paid by the expected final maturity date (approximately 93 months after closing) and the issuer's 30 day cure period has elapsed.
V-SCORE AND LOSS SENSITIVITY
Moody's V Score. The V Score for this U.S. Rental Truck ABS transaction is Medium and indicates "Average" structure complexity and uncertainty about critical assumptions. Moody's ratings analysis makes assumptions about key factors, such as (1) the likelihood of default of Avis (as the guarantor of BTR's lessee obligations) and the truck manufacturers, (2) the composition of the pool's truck mix over time and (3) the realizable value of the portion of the fleet backing the ABS should fleet liquidation be necessary. The last assumption in particular has relatively high potential variability for the following reasons. Disposition of trucks occurs irregularly (trucks usually have a longer use (i.e., older age) prior to their disposition than do non-commercial vehicles). Fewer re-sale value observation points exist for trucks than there are for non-commercial vehicles. And, like non-commercial vehicles, data is unavailable on truck values in a large scale stressed liquidation. To address this variability, we make assumptions we believe to be conservative about appropriate recovery value haircuts.
Moody's V Scores provide a relative assessment of the quality of available credit information and the potential variability around the various inputs to a rating determination. The V Score ranks transactions by the potential for significant rating changes owing to uncertainty around the assumptions due to data quality, historical performance, the level of disclosure, transaction complexity, the modeling and the transaction governance that underlie the ratings. V Scores apply to the entire transaction (rather than individual tranches).
Moody's Parameter Sensitivities. For this exercise, we analyzed stress scenarios assessing the potential model-indicated ratings impact if (a) the current B1 rating of Avis was to immediately decline to B3 and Caa1 and (b) the assumed modeled haircuts to estimated depreciated truck market values were increased by 5%, 10% and 15%. Haircuts are expressed as a percentage of the estimated depreciated market value of the truck collateral. We model potential truck collateral liquidation value by estimating depreciated market value and then applying haircuts and we use triangular distributions for those haircuts. The stresses increase the base case triangular distribution haircuts by the following percentage points: 5%, 10% and 15%. For example, since the triangular distribution haircuts in the base case are (10%, 22%, 33%), and this is increased by 5 percentage points, then the resulting stressed haircut would be a triangular distribution of (15%, 27%, 38%). Using such assumptions, the Baa2 initial model-indicated rating for the Series 2012-2 Notes might change as follows: (a) with Avis rated B1, the Baa2 initial note rating would remain at Baa2 under the base recovery but change to Baa3, Ba1 and Ba2 with the each lower recovery assumption; (b) with Avis rated B3, the Baa2 initial note rating would remain at Baa2 under the base recovery but change to Ba1, Ba2 and B1 with the each lower recovery assumption; (c) with Avis rated Caa1, the Baa2 initial note rating would change to Baa3 under the base recovery and change to Ba1, Ba3 and B1 with the each lower recovery assumption.
Parameter Sensitivities are not intended to measure how the rating of the security might migrate over time, rather they are designed to provide a quantitative calculation of how the initial rating might change if key input parameters used in the initial rating process differed. The analysis assumes that the deal has not aged. Parameter Sensitivities only reflect the ratings impact of each scenario from a quantitative/model-indicated standpoint. Qualitative factors are also taken into consideration in the ratings process, so the actual ratings that would be assigned in each case could vary from the information presented in the Parameter Sensitivity analysis.
PRINCIPAL RATING METHODOLOGY
The key factors in Moody's rating analysis include the probability of default of ABCR (as guarantor of BTR's obligations as lessee), the likelihood of a bankruptcy or default by the manufacturers of the trucks backing the ABS, and the recovery rate on the rental trucks in case ABCR defaults. Monte Carlo simulation modeling was used to assess the impact on bondholders of these variables.
The default probability of ABCR is simulated based on its probability of default rating and Moody's idealized default rates. In addition, we stress the rating of ABCR to provide a limited degree of de-linkage of the rated ABS from ABCR's rating.
Under the terms of the simulation, in cases where ABCR does not default it is assumed that bondholders are repaid in full and no liquidation of the portion of the Issuer's rental truck fleet backing the ABS is necessary.
In cases where ABCR does default, we always assume that the portion of the Issuer's fleet backing the ABS must be liquidated in order to repay the bondholders. In those cases, the default probability of the related manufacturers must also be simulated. The default probability of manufacturers, whose trucks are included in the collateral, is derived from their respective ratings if they are rated by Moodys, otherwise the default probability is derived by assuming the unrated manufacturer is rated B2. Upon liquidation, the trucks are assumed to be sold in the open market. The truck pool is static although trucks may drop out due to reaching age limitations or due to casualty. Indeed, based solely on the trucks' aging, the truck mix by manufacturer, truck type and model year changes moderately over time. To account for this, we tested both the initial mix and the projected mix (the later being derived from the scheduled disposition of trucks due to age). The projected mix was chosen since thereafter the mix roughly stabilizes until late in the deal term.
The depreciated market value of a truck at time of liquidation before any haircuts are applied is estimated using market depreciation data from Black Book for each model of truck by manufacturer in the collateral pool. In making this calculation we give credit to the fact that the original purchase prices for the trucks were below MSRP by assuming the discount to MSRP actually achieved for the vehicles in the securitized pool. We also assume a delay in sale of nine months and therefore net out an additional nine months of depreciation. This nine month delay in truck liquidation contemplates potential legal challenges to obtaining control of the trucks and even more significant, the potential difficulties of marshaling and selling the pool's trucks given a market with limited market liquidity.
The base liquidation value of sold trucks is determined by applying a base haircut to the estimated depreciated market value. The base haircut is simulated using a triangular distribution (i.e., minimum, mode, maximum) with values of (10%, 22%, 33%). We also simulate the manufacturer's status: non-bankrupt or bankrupt. An additional 10% haircut is applied to the base liquidation value of the trucks from any manufacturer whose simulated status is bankrupt. We believe such moderate haircut is appropriate for trucks from bankrupt manufacturers given our view that the manufacturer's bankruptcy status has only a moderate linkage to truck resale value.
Finally, unlike rental car ABS, none of the trucks in the pool benefit from program agreements with the manufacturers (that is, agreements where the manufacturer guarantees either the minimum depreciation or the resale value of the trucks upon disposition) and as such no modeling of such feature is necessary.
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Jiang XuAsst Vice President - Analyst Structured Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Michael McDermitt VP - Senior Credit Officer Structured Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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