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Avis Budget Lowers Interest Expenses

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Avis Budget Car Rental, LLC, a wholly-owned subsidiary of Avis Budget Group Inc. (CAR - Free Report) , yesterday announced that it had increased its revolving credit facility while lowering the rate of interest and extending the maturity period. These form part of the company’s efforts to reduce its interest expenses.

Avis Budget, which had a maximum capacity to borrow $1.50 billion under its revolving credit facility, is now authorized to borrow $1.65 billion at an interest rate of one month of LIBOR plus 225 basis points (bps). This represents savings of 75 bps from the previous interest rate of one month of LIBOR plus 300 bps.

Apart from increasing the borrowing capacity, Avis Budget extended the maturity period from 2016 to 2018. Consequently, from now onwards, Avis Budget is expected to save over $5.0 million annually on interest expenses.

Borrowing costs have gone down significantly, helping the companies to obtain easy financing at compelling prices. Corporate bonds and borrowings from banks are in high demand as the U.S. treasuries are yielding low rates. We believe that the aforementioned moves by the company will provide it financial flexibility to drive long-term growth.

In Jun 2013, the company underwent a similar transaction when it expanded its term loan facility to $1.0 billion from $900 million. The $1 billion term loan, issued by the company's wholly-owned subsidiary Avis Budget Car Rental LLC was refinanced at the LIBOR plus interest rate of 2.25%, subject to a LIBOR floor of 0.75%. This represents savings of 75 bps from the previous interest rate of LIBOR plus 2.75%, subject to a LIBOR floor of 1%.

Simultaneously, the company announced the redemption of its $124 million worth of senior notes due 2018, bearing an interest rate of 9.625%, eliminating the outstanding balance of its high-cost debt.

Moreover, earlier this year, the company concluded a senior notes offering of $500 million due 2023, bearing an interest rate of 5.5%. The proceeds from the transaction were used to eliminate a portion of the company’s previously issued high-cost debt instruments, including principal amounts of its $325 million senior notes with a 9.625% interest rate and maturity date due in 2018 and $25 million notes with an interest rate of 9.75% and due 2020.

In conjunction with its first-quarter 2013 results, the company raised its corporate debt related interest expense forecast for fiscal 2013 to $240 million, from an earlier projected range of $230–$235 million. The increase in net interest expense primarily was due to the cost of financing the Zipcar acquisition, partially offset by benefits from the company’s already completed refinancing. However, this represents a $30 million decline from the 2012 level.

Avis Budget Group is the leading vehicle rental company providing vehicle rental services through its Avis and Budget brands in more than 10,000 rental locations in about 175 nations across the globe. Additionally, the company’s newly acquired Zipcar brand enables it to provide car sharing services to more than 790,000 members. The company operates most of its car rental offices in North America, Europe and Australia directly, and operates primarily through licensees in other parts of the world.

Currently, Avis Budget carries a Zacks Rank #4 (Sell). Other stocks that are performing well in the business services industry include comScore, Inc. (SCOR - Free Report) , Essex Rental Corp. and SouFun Holdings Ltd. (SFUN - Free Report) . Of these, comScore carries a Zacks Rank #1 (Strong Buy) while Essex and SouFun Holdings have a Zacks Rank #2 (Buy).

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