Fitch Ratings Affirms Cendant After Budget Assets Acquisition

    NEW YORK--Aug. 23, 2002--Fitch Ratings has affirmed the 'BBB+' rating for Cendant Corporation's (Cendant) senior unsecured debt. In addition, the 'BBB' subordinated debt and 'F2' commercial paper ratings are affirmed following Cendant's announcement late yesterday that it has agreed to acquire certain assets of Budget Group, Inc. (Budget) out of bankruptcy. Fitch has also affirmed PHH Corporation's (PHH) senior debt at 'BBB+' and commercial paper at 'F2'. PHH is a wholly owned subsidiary of Cendant. The amount of debt, including PHH, impacted by the rating affirmation is approximately $5.5 billion. The Rating Outlook for both Cendant and PHH is Negative.
    Budget filed for bankruptcy protection on July 29, 2002 in the U.S. Bankruptcy Court in Delaware following ongoing operating weakness that was exacerbated by the slow economy and downturn in travel after Sept. 11, 2001. According to the terms of the asset purchase agreement with Budget, Cendant has agreed to pay $107.5 million in cash and assume financing for Budget's $2.7 billion vehicle and securitization program. Cendant expects the deal to close during the fourth-quarter of 2002 at which time it will fund the purchase price with a combination of cash and a temporary draw under one of its two revolvers. Fitch expects the draw on the revolver to be repaid from Cendant's cash flow. After purchasing the assets, Cendant plans to refinance Budget's asset-backed debt under its own fleet securitization program.
    The assets being acquired by Cendant include the Budget brand and locations in the United States, Canada, Latin America, New Zealand and Australia together with their respective car fleets. Assets in Europe, the Middle East and Africa are not being acquired by Cendant. Cendant will also acquire the Ryder brand name and trucks associated with that business.
    Budget owns and operates car and truck rental operations under the Budget and Ryder brands in the United States, Canada, Latin America, Europe, the Middle East, Australia and New Zealand. Budget has over 1,000 domestic car rental locations of which approximately 600 are company-owned. In 2001, Budget generated approximately $2.3 billion in revenue and had an average fleet size of approximately 153,000 vehicles.
    Since Avis and Budget serve two different segments of the car rental business, the corporate and leisure segments, respectively, Budget should be complementary to the existing car rental business at Cendant. While Cendant plans to realize cost savings from greater economies of scale and back office synergies, it will maintain the separate identity and front office operations of each brand.
    In addition to Budget, Cendant has made several smaller acquisitions recently. On August 12, 2002, Cendant agreed to acquire DeWolfe Cos. (DeWolfe), a publicly-traded New England real estate brokerage firm, for approximately $149 million including assumed debt. DeWolfe has 94 offices primarily in the North East that will be merged into NRT, Inc., a Cendant subsidiary that owns and operates Coldwell Banker and ERA. DeWolfe locations will be operated under the Coldwell Banker brand name. The other smaller acquisitions include Lodging.com and Sunshine Group, Ltd. for undisclosed amounts.
    Cendant's ratings consider the diversity and stability of its core businesses, its leading position in most of its business lines, and the maintenance of adequate liquidity to fund major near term obligations. Fitch expects profitability to improve as acquisitions completed in 2001 and early 2002 are integrated and Avis and other travel-related businesses recover from the recession and events of Sept. 11, 2001.
    Cendant has less integration risk for the above acquisitions since it already operates a national car rental business and franchises three real estate brokerage brands. Fitch does not expect leverage to be materially impacted by the Budget and DeWolfe acquisitions since Cendant is using cash-on-hand to fund the majority of the purchase price and the temporary draw under the revolvers should be repaid within a few months. On an adjusted basis, Cendant's leverage will increase due to Budget's incremental rent expense and off-balance sheet securitizations, both of which are factored into Fitch's adjusted debt calculation. Incremental earnings from Budget should partially mitigate the impact on adjusted leverage. Cendant's liquidity is adequate given its availability under its revolvers and ample cash flow.
    Going forward, Fitch expects Cendant to moderate its significant acquisition activity so that it can reduce debt from cash flow, integrate its time share, travel distribution, car rental and real estate brokerage acquisitions, and demonstrate several quarters of continued stable operating results.