Hertz ABS’ bankruptcy-remote status not imperiled by rare parking of LCs in SPV — sources - Debtwire

Hertz ABS’ bankruptcy-remote status not imperiled by rare parking of LCs in SPV — sources

29 September 2017 - 12:00 am

Hertz’s use of its ABS SPV as a place to park letters of credit used to help the company meet unsecured debt covenants does not put the SPV’s bankruptcy-remote status at risk, according to two securitization attorneys, an investment bank analyst and a ratings agency analyst.


The practice is unusual, according to the attorneys. “I agree … that this is certainly odd,” said the first attorney. But Hertz appears to be well within its rights, said the second attorney. “They’re doing something novel, but permissible,” said the second attorney.


As reported, Hertz is using its Hertz Vehicle Financing II SPV as a place to park letters of credit whose main purpose is to provide additional covenant cushion to the company’s first lien revolver (see story, 15 September). Hertz increases and decreases the outstanding balance of the letters of credit as needed to aid in the revolver’s covenant debt calculation. The company has been doing so since February, when the revolver’s terms were amended to allow the tactic.


Ratings agencies examine every ABS for signs than issuers aren’t “messing” with the securitized assets — a practice that could jeopardize a securitization’s true sale status, and thus make the assets available for consolidation in the case of the issuer’s bankruptcy, according to the ratings agency analyst. “It’s a risk we look at in every ABS structure,” he said.


But in the case of Hertz, there is no sign that issuer Hertz Corp is messing with the securitized assets — Hertz leases on rental vehicles owned by the SPV, the analyst said. While the SPV is required to maintain a minimal level of outstanding letters of credit as part of its credit enhancement, any increases or decreases in the LC balance beyond that level aren’t a concern, as long as the minimum level is maintained.


“This is probably OK from a bankruptcy-remoteness standpoint unless company creditors have somehow been deceived and it truly would be unfair not to substantively consolidate,” said the first attorney.


Having the additional LCs in the trust is actually a good thing, the ratings agency analyst said. “From our standpoint, it’s a credit positive for the ABS,” he said.


The ABS are mostly supported by the vehicle leases and vehicles themselves, said the investment bank analyst. The letters of credit themselves don’t provide much support to the bonds. “It’s not really meaningful in the ABS,” said the investment bank analyst.


As reported, Hertz maintains credit enhancement in its ABS by shuffling the SPV’s vehicle portfolio to ensure the value of the vehicles meets monthly mark-to-market and disposition tests.


ABS asset consolidation uncommon


All ABS secure opinion letters from law firms verifying the structures’ true sale and non-consolidation status, the ratings agency analyst said. The agency is comfortable with the reasoning in the letters secured by Hertz, the analyst said.


In any event, said the first attorney, consolidation of ABS assets in the event of an issuer bankruptcy is very rare.


“Bankruptcy courts are courts of equity and … substantive consolidation is an extraordinary remedy that’s used only very sparingly,” the first attorney said. “In particular, substantive consolidation would be unlikely to be granted if ABS investors would be harmed by substantive consolidation.”


Hertz Vehicle Finance bond prices continue to hold up despite concerns about the issuer’s financial well-being. As reported, Debtwire ABS sister product Xtract has published two reports concluding that Hertz has defaulted on 6.75% senior notes due in 2019 (see story, 20 September).


On Thursday (28 September), Finra’s TRACE reported three trades of USD 500,000 pieces of HVF 2015-1 B at prices of 100.273 and 100.285 — above most prices reported to TRACE in recent months.


A USD 10m+ HVF 2016-4 A traded Thursday at 98.578, lower than trades at 98.645-98.711 earlier in the week, but above prices with 98.4 handles earlier in the month.


by John Wilen