Plunging Used Car Prices Wreak Havoc On Rental Car Bondholders

Once hedge fund darlings, almost no one is more perfectly aligned to get obliterated by falling used car prices than America"s auto rental companies, Hertz and Avis.  As Bloomberg notes today, on a combined basis, Hertz and Avis dump about 400,000 vehicles per year into the used car market and operate fleets that are multiple times larger. 

And with used car prices plunging, bondholders are starting to get slightly anxious about the collateral impact of writing down billions of dollars worth of capital assets.

Debt issued by Hertz Global Holdings Inc. and Avis Budget Group Inc., which had traded at or above par in recent years, tumbled to new lows earlier this month amid signs that used-vehicle prices are dropping twice as much as expected. That’s bad news for companies that collectively have to dispose of about 400,000 vehicles a year, and especially for Hertz, whose junk-rated debt is teetering close to a downgrade.

Hertz and Avis typically buy the cars outright from manufacturers or get them on a contract with a buyback agreement. The latter, called program cars, cost more because manufacturers assume the resale price risk. Vehicles that Avis and Hertz buy outright are called risk cars because rental companies make their own assumptions about what the cars will be worth when it’s time to sell. Combined with closely held Enterprise Holdings Inc., the three companies control more than 95 percent of the U.S. rental fleet, according to Manheim.

Program cars made up only 20 percent of Hertz’s U.S. fleet last year, according to a company filing, less than half the 44 percent for Avis’s total fleet. Hertz will try to buy more of those this year, Chief Financial Officer Tom Kennedy told investors during a February earnings call.

Of course, as J.D. Power pointed out in it"s most recent "NADA Used Car Guide Industry Update," the flood of lease returns has just started to push used car prices lower....

...and, unfortunately, the volume of lease returns is only expected to grow...

...all of which Morgan Stanley thinks could spark a 50% decline in used car prices over the coming of years. 

All of which begs the obvious question of who is right...auto supplier equity holders or Hertz bondholders?

How Much Must A Family Earn To Live In Each Major US City

London-based realtor Nested produced the 2017 Rental Index in conjunction with their recent Real Estate Index. The study illustrates the price of renting per square foot in 10 major US cities and a number of metropolises worldwide. The research conveys the minimum gross salary required to support an individual and a family of four in rented property based on the minimum space recommended for one person, and for four people respectively.

Some of the key findings:

• The top three most expensive cities to rent in worldwide are American: San Francisco, New York City and Boston


• At $1.09 per square foot, Detroit is the cheapest of the American cities included, and is more affordable than Cape Town, Bangkok and Jakarta.


• New York City and San Francisco are five times more expensive than Detroit, and three times more expensive than Houston

The study was undertaken to understand the costs associated with renting as an individual and as a family, and to determine whether cities are becoming increasingly unaffordable. The inclusion of the global ranking alongside the US ranking allows easy comparison between the two, and illustrates the relative unaffordability of major US cities compared to other global settlements.

The price per square foot of property was calculated based upon current market listings for all locations researched, while the minimum space recommended for one person and four people is laid out in guidelines from an urban planning authority. The gross salary guideline was included to help illustrate relative affordability.

Here are the study"s core findings about the US market.

• The most expensive city in the United States to rent property is San Francisco, at $4.95 per square foot.


• To afford to rent the minimal rental space recommended for one person and cover additional living costs in San Francisco, an individual needs a gross income of $85,985.38 per year. 


• The minimal rental space recommended for a family of four costs $3,942.82 per month in San Francisco. To afford that and cover additional living costs, a gross income of $163,151.17 per year is required. 


• The most affordable American city in the list is Detroit, where a square foot costs $1.09.


• To live alone in Detroit and cover additional living costs, an annual salary of only $18,933.96 is required.


• The afford the minimal space recommended for a family of four and cover additional living costs in Detroit, an income of $35,926.34 is required.


• A family rental in Detroit is cheaper than a single rental in seven US cities in the list, including Miami, Los Angeles and Seattle.


• Rental properties in New York City and San Francisco are more than three times more expensive than in Houston, and almost five times more expensive than in Detroit.

The results for the United States, ranked by the cost of rental per square per foot, are as follows:

* * *

Expanding to all global cities:

• The three most expensive cities to rent globally are all in America: San Francisco, New York City and Boston. 120 global cities were included in the study.


• Of the cities included in the list, five of the top ten most expensive cities to rent are in the US.


• The most expensive city outside of the US for rental is Hong Kong, where a annual gross income of $66,530.07 is required to afford the minimum space recommended for one person and living costs.


• To afford the minimum space recommended for a family of four and cover additional living costs in Hong Kong, an annual income of $126,236.28 is required. 


• Of the 120 cities included, Cairo is the cheapest city to rent property, at just 28 cents per square foot.


• To afford the recommended space for one person and cover additional living costs in Cairo, a gross income of $6,130.89 per year is needed.


• To pay for family rental and additional living costs in Cairo, a gross income of $11,633.11 per year is needed.


• At $1.09 per square foot, rental in Detroit is cheaper than in Cape Town, Bangkok or Jakarta.

The top 25 results for the global cities list, ranked by the cost of rental per square per metre, are as follows:

For the full list, go here.