Zipcar (NYSE:ZIP) has renewed its asset backed securitization (ABS) facility to support the funding of its 2012 fleet expansion in the U.S. It has significantly reduced its vehicle acquisition costs over the past year by shifting from leasing vehicles to purchasing vehicles through ABS facility that provides it access to lower-cost vehicle financing. Zipcar operates a global car sharing network of approximately 700,000 members and 9,000 vehicles in the United States, Canada and the United Kingdom. The company competes with traditional car-rental companies like Hertz Global Holdings (NYSE:HTZ), Avis Budget Group (NYSE:CAR) and car sharing services like Connect by Hertz, Enterprise’s WeCar, UHaul’s UCarShare and City Car Share.
Renews ABS Facility With Favorable Terms
Zipcar has renewed its asset backed securitization (ABS) program with Credit Agricole Corporate and Investment Bank. First announced in May 2010 and extended in May 2011, this renewed facility provides an aggregate of $50 million in variable funding to support Zipcar’s growing domestic fleet. The one-year renewal also represents an improvement in the current agreement terms.
Funding to Cover 2012 Domestic Fleet Expansion Needs
While Zipcar plans to continue leasing vehicles in Canada and the U.K, it is now replacing its U.S. fleet with purchased vehicles with access to cheaper vehicle financing. The number of vehicles under operating leases fell from 90% in 2009 to 50% in 2011. The ABS facility helps Zipcar lower its vehicle acquisition cost, which forms a key driver of car-sharing business. The company expects to increase the percentage of its U.S. fleet funded under the expanded ABS facility from current two-thirds to more than 90% by the end of 2012.
Zipcar is likely to launch in 2-3 new markets in 2012 as well as deepen its penetration in the existing markets. The expanded ABS facility is expected to cover Zipcar’s domestic fleet expansion needs for the current year. Zipcar’s fleet costs currently stand at almost 66% of total revenues and include vehicle lease costs. Achieving lower cost of vehicle funding is extremely important for Zipcar to improve profitability. Its long-term target is to bring the fleet costs down to 59%-60%. If the company succeeds in doing so, its North America EBITDA margins could accordingly improve to 25%-26% in the long term as the business matures and penetration levels improve, from the current 19%.
The Asset Backed Securitization or ABS facility was first announced in May 2010. Zipcar later renewed this facility in May 2011 to provide $50 million vehicle finance with more favorable interest rates and collateralization. In January 2012, it issued a new series of variable funding notes for its ABS facility for $50 million with Barclays Capital, thereby increasing the total availability of ABS funding lines to $100 million, with improved terms.
We have a price estimate of $18 for Zipcar, about 70% ahead of the market price.