As Hertz scrambles to modify its monthly vehicle-lease payments and other financial commitments, Fitch Ratings is bracing for the growing possibility the rental-car company soon will be filing for bankruptcy because of the collapse of the travel industry due to the coronavirus pandemic.

On Tuesday, Fitch Ratings said it downgraded all of the outstanding asset-backed securities (ABS) issued by Hertz Vehicle Financing, totaling $6.04 billion. The firm explained the rating actions are driven by elevated risks to the ABS notes stemming from Hertz acting as servicer, administrator, lessee and guarantor for the note and the continued failure to pay the issuer’s ongoing monthly operating lease obligations in full, along with the seemingly high possibility of their inability to meet future ABS liabilities when due.

“The rating actions encompass the unprecedented impact of the coronavirus pandemic on the travel sector, and Hertz’s operating cash flow generation threatening their ability to service the ABS notes, as well as the pandemic’s impact in driving Hertz’s fleet depreciation higher and values lower in the past two months. The pandemic continues to place unforeseen pressure on the U.S. economic outlook and rental-car sector,” Fitch Ratings said in a news release.

“The ongoing dislocation, closures of and limited activity in the wholesale market across vehicle auctions nationwide is creating unique challenges for Hertz in de-fleeting to generate disposition proceeds, negatively affecting their monthly operating lease liabilities, and threatening their ongoing corporate health and viability, driving them closer to bankruptcy. These heightened risks, along with the uncertainties of how a potential Hertz bankruptcy may unfold, contributed to the ABS note downgrades,” Fitch Ratings continued.

Fitch Ratings recapped that on April 29, Hertz filed an 8-K with the Securities and Exchange Commission disclosing that on April 27 the company failed to make the full operating lease payment, including interest and principal on the ABS notes. The filing also indicated Hertz did not make the required lease obligation of $498 million for the March collection period. This event triggered an amortization event of the outstanding ABS notes on May 1, following a short grace period.

“In an amortization event, all proceeds from Hertz’s vehicle sales are directed towards paying down principal of the notes going forward,” Fitch Ratings said.

Following this failure to pay event, Fitch Ratings noted that Hertz obtained forbearance on the fleet liquidation event and a waiver from its senior credit facility lenders to delay such payment event to May 22, as disclosed in an 8-K filing with the SEC on May 5. This forbearance allowed Hertz time to potentially workout additional financing solutions for or restructurings of the Issuer liabilities outside of a fleet liquidation event, in which all vehicles will be sold to pay-off the outstanding notes.

“It is uncertain if such waivers/forbearance and process thereof, as well as an additional forbearance required from ABS noteholders, will proceed in coming weeks,” Fitch Ratings said.

“Subsequently, Hertz made an ABS note interest payment on or around May 5 to the Issuer for the March 2020 collection period lease obligation, but the principal payment remains unpaid,” Fitch Ratings added.

While the firm acknowledged it is unclear exactly how the pandemic and a Hertz bankruptcy will evolve, Fitch Ratings emphasized that its ABS analysis assumes that Hertz will continue to operate via a Chapter 11 bankruptcy filing and not proceed to liquidate the company and its assets via a Chapter 7 filing.

“Therefore, Fitch would expect that the process would involve Hertz continuing to operate and maintain a notably smaller fleet, versus a complete liquidation and dumping of their entire portfolio into the wholesale vehicle markets and auctions at once in such a stressed environment currently,” Fitch Ratings said. “The strategy of operating in bankruptcy with a smaller fleet may alleviate the severity of the values declines in their fleet to some extent.”

Fitch Ratings went on to explain that the issuer is structured such that, in the current ongoing amortization event, all outstanding series, including the Hertz Vehicle Financing, receive a pro-rata share of vehicle liquidations which then pay down the notes in each series by order of seniority.

Since it’s already May, Fitch Ratings said it assumed an additional month of depreciation on the outstanding fleet balance utilizing depreciation forecasts for 2020 at a “conservative” 30% annual rate. The resulting fleet balance was thus reduced by 2.50% depreciation (30% divided by 12 months) to $11.7 billion.

Fitch Ratings continued to mention that it then assumed a Hertz fleet liquidation to take up to six months.

“This time period was utilized on the assumption that Hertz continues to operate after filing a Chapter 11 bankruptcy while continuing to liquidate their fleet to a more sustainable ongoing operating level under the Issuer early amortization event,” Fitch Ratings said.

“Uncertainty exists around such a liquidation scenario timeline, whether in or out of a Hertz bankruptcy, and may drive Fitch to revise such a base six-month liquidation period out longer, which may then affect ABS ratings negatively,” the firm added.