Hertz debt package ‘eye-catching’

As the ratings agencies and the debt markets consider Hertz’s $12bn debt package, buying group maintains confidence.

Twelve-plus billion dollars: It’s a figure that’s sure to daunt the financial markets. But whether the recent Hertz deal brings the debt market or the company to its knees remains to be seen.

All three ratings agencies have put the company’s debt under review for a possible downgrade after the enterprise-value $15 billion acquisition of Ford Motor’s Hertz car rental division was announced this past Monday. The buying group, comprised of Clayton Dubilier & Rice, The Carlyle Group and Merrill Lynch Global Private Equity, will finance the transaction with $2.3 billion worth of equity, split three ways, bank loans totaling $5.3 billion, and more than $7 billion of debt in the form of asset-backed securities tied to Hertz’s car rental fleet.

Fitch Ratings, one of the credit rating agencies that put the company’s debt under review, cited in a press release, “The purchase price could result in approximately $3 billion of goodwill being added to Hertz’s balance sheet in addition to the existing $544 million at June 30, 2005. As a result, from a financial institutions’ perspective, Hertz leverage will rise sharply, on a tangible basis, while the company’s risk-adjusted capitalization could weaken.”

Another possible concern arises when one considers the capacity of the debt markets. There was no problem funding the $11.3 billion SunGard acquisition this past July, which reportedly was financed with $5 billion of bank debt and $3 billion of high yield notes. However, other large LBOs, including the Nieman Marcus and Toys ‘R’ Us deals, are also coming to market soon, which could potentially take a bite out of demand for new issuance. The SunGard high-yield offering, however, was auspicious enough that there is speculation the investors could seek out a dividend recap in a couple months.

Despite the number of deals, and the size of Hertz’s own debt needs, the buyers are fully confident in financing the transaction.

In a recent interview with PEO, when asked if he was bracing for apprehension about the capacity of the debt markets to come to terms with Hertz’s financial package, Clayton Dubilier president and CEO Donald Gogel said, “We don’t think so… The headline [about the debt] is certainly eye-catching, and it’s one of the largest transactions in a long time, but more than half of the total amount of debt is for the cars’ fleet financing, and that market is very well developed in the US… The actual bank debt and bond deal is just over $5 billion. Although that’s not a small figure, it’s well within the parameters of a number of deals that were already done this year.”

Meanwhile, Steve Miller, a managing director at Standard & Poor’s LCD Group, echoed those sentiments. “We don’t have too much detail yet, but there will be plenty of capacity [in the markets], I’m sure.”

Gogel noted that, if the car rental company’s business were to face a temporary downturn, its financing was flexible in that an offloading of cars would result in a diminished fleet debt.

Deutsche Bank AG is underwriting the bank debt, while Lehman Brothers will lead the asset backed securities financing.