Fitch Initiates Coverage on AutoNation; Rates Senior Unsecured Notes 'BBB-'

NEW YORK--June 15, 2005--Fitch Ratings has initiated coverage on AutoNation, Inc. by assigning ratings to the following:

-- $350 million senior unsecured notes 'BBB-';

-- $500 million bank credit facilities 'BBB-';

-- Rating Outlook Stable.

The ratings reflect AutoNation's position as the largest automotive retailer in the U.S., which provides it with economies of scale and financial flexibility, the diversity of its operations, and the high level of support from the automotive manufacturers. Also considered is the weakness of the domestic automotive manufacturers and the negative impact of higher interest rates on the company's operating results.

AutoNation is the largest automotive retailer in the U.S., operating 352 franchises across 17 states. The diversity of AutoNation's operations, across product areas, geographies, and brands, adds stability to its operating results. While new vehicle sales accounted for about 61% of revenues for the latest twelve months ended March 31, 2005, this business is low margin and represented only about 28% of gross profit for the same period. The higher margin and historically more stable parts and service as well as finance and insurance businesses are more significant to the company, representing 57% of gross profit for the latest twelve month period, and are expected to grow over time.

Geographically, AutoNation's stores are located primarily in the sunbelt region, which includes several rapidly growing markets. In addition, within the new vehicle segment, the company's operations are distributed across the domestic, premium luxury, and import vehicle brands. Over time, the company has adjusted its dealership base to include more luxury and import brands. However, AutoNation continues to maintain a sizeable exposure to the domestic automotive manufacturers, with 45% of the company's new vehicle revenue from sales of domestic brands during the first-quarter 2005. In general, these manufacturers continue to lose market share over time.

AutoNation's scale allows it to realize synergies and achieve cost savings not available to many of its competitors. AutoNation has reduced new vehicle inventory by leveraging its inventory across its store base. Inventory supply declined to 53 days at the end of 2004 from 71 days at the end of 2003 and was 60 days at March 31, 2005, which was below the industry average. Going forward, Fitch anticipates that AutoNation will achieve cost savings as it consolidates certain accounting and administrative functions at its shared resource centers, focuses on growing its parts and service businesses, consolidates vendors, initiates common pay plans, and further implements best practices.

Of importance is the support AutoNation receives from vehicle manufacturers. In addition to retail and dealer incentives which help spur demand for new vehicle sales and reduce inventory losses, AutoNation receives floorplan (inventory) assistance. AutoNation finances the purchase of new vehicle inventory through borrowings (floorplan notes payable) primarily from the captive finance subsidiaries of the manufacturers. The manufacturers provide financial support through floorplan assistance which helps to offset the interest expense on the floorplan notes payable.

For the latest twelve months ended March 31, 2005, floorplan interest expense of $90.7 million was offset by floorplan assistance of $118.1 million, with AutoNation realizing a net benefit of $27.4 million. However, AutoNation's floorplan interest expense is a variable rate expense which is offset by generally fixed rate floorplan assistance. Therefore, of concern is that as interest rates rise, the company will likely realize a net expense instead of a net benefit from floorplan financing.

AutoNation's size and diversity of operations have allowed it to maintain strong and stable cash flow generation. Cash flow from operations less capital expenditures but before one time IRS tax payments was $454.2 million for the latest twelve months ended March 31, 2005. This compares to $609.1 million in fiscal 2003. Fitch expects that the company will use its future free cash flow generation to fund share repurchase and acquisition activity in a disciplined manner. As a result, debt levels are expected to remain relatively steady and credit metrics are anticipated to improve as the company realizes operating and cost synergies.

Fitch's rating definitions are available on the agency's public web site, www.fitchratings.com. Published ratings, criteria and methodologies and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.