Interest payments on Hertz Vehicle Financing II asset-backed securities (ABS) funded by draws on existing letters of credit (L/Cs) are a key element in the troubled vehicle rental giant's interim settlement and agreement with investors holding those securities.

Founded in 1918, Hertz filed for bankruptcy in late May seeking a judge's permission to restructure its business and free itself from US$19 billion in debt. The coronavirus pandemic left Hertz with a mostly idle fleet of 700,000 cars.

The basis of the agreement is a six-month strategy to reduce the size of its fleet and realign its business while paying down ABS note liabilities.

Crucial L/C role

Interest payments on the ABS notes will continue to be funded by draws on L/Cs provided by Goldman Sachs Bank.

The L/Cs have funded ABS interest payments since Hertz filed for bankruptcy.

Key elements

Other key elements of the forbearance settlement agreement with ABS investors include a realignment of the company's fleet size to a 310,000 unit target.

Hertz will also pay certain fees and expenses of advisors to the ABS noteholders and other agents fees.

Fitch view

While Fitch Ratings believes the agreement is a step in the right direction for ABS notes, the agency believes the company still faces notable execution risks due to ongoing coronavirus impact on the travel and rental car sectors and a challenging operating environment, including volatility in used vehicle values and ongoing functioning of wholesale vehicle markets.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.