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Fitch Ratings Affirms Cendant & PHH; Rating Outlook Negative.

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Fitch Ratings has affirmed the 'BBB+' rating for Cendant Corporation's (Cendant) senior unsecured debt, the 'BBB' rating for its subordinated debt and the 'F2' short-term rating for its commercial paper. Fitch has also affirmed PHH Corporation's (PHH; a wholly owned subsidiary of Cendant) senior debt rating of 'BBB+' and short-term rating including commercial paper of 'F2'. The amount of debt, including PHH, impacted by the rating affirmation is approximately $6.1 billion. The Rating Outlook for both Cendant and PHH is Negative.

Cendant's ratings consider the company's leading position in most of its business lines and concentration of franchise and fee-for-service businesses which have low capital expenditures and fixed operating costs. The ratings also reflect strong free cash flow and the $2.9 billion revolver which provides adequate liquidity to fund near-term obligations. Availability under the revolver is approximately $1.8 billion, net of $1.1 billion of outstanding letters of credit, primarily issued as collateral support for car rental securitizations. The above positive factors are weighed against leverage which is somewhat high although improving and a concentration of travel-related businesses, which could continue to be impacted by the slow economy. The Negative Outlook is due to continued softness in the travel sector and the high level terrorism alert status, regulatory risk in the travel distribution segment and business risk associated with the integration of Budget.

The ratings and Outlook for PHH strongly reflect those of its parent, Cendant. The ratings of PHH are highly linked to those of Cendant given demonstrated support to PHH and the control typically exercised by a parent company over its subsidiaries. In addition, the rating reflects PHH's strong market position in its operating segments and lower risk assets retained on its balance sheet. These strengths are offset by cyclicality of the mortgage business and potential impact of the interest rate environment on mortgage servicing rights.

In 2002, Cendant reduced corporate debt by more than $500 million and, since the beginning of 2003, by approximately $100 million, including $394 million of debt retired in May 2003. By refinancing its short-term debt, Cendant has extended its maturity schedule. Cendant has committed to allocating its 2003 free cash flow to reduce debt by $1 billion, repurchase $500 million of common stock and make minor acquisitions for approximately $500 million. After the Budget acquisition late last year, Cendant committed to refrain from making significant acquisitions so that it can focus on its existing portfolio of businesses and strengthen its balance sheet. Despite weaker results in travel-related businesses in he first quarter of 2003, which may impact full-year results, Fitch anticipates that the company can still achieve significant reduction in debt in 2003. This would provide a stronger ability to endure continued economic weakness and could result in a change in rating outlook.

Cendant's credit ratios have generally improved since 2001 as acquisitions have been integrated. Adjusted leverage, as measured by total debt plus eight times rent divided by EBITDAR, improved to 3.1 times (x) in 2002 from 3.8x in 2001. After factoring in the $394 million of debt retired after the first quarter in 2003, pro-forma adjusted leverage has continued to improve to approximately 3.0x.

In compliance with the new accounting rules for consolidation of variable interest entities, Cendant is consolidating Bishop's Gate, its off-balance sheet mortgage securitization facility, and Trilegiant, a membership services business. The consolidation of Trilegiant will likely result in a non-cash charge reflecting the cumulative effect of an accounting change in compliance with FASB Interpretation No. 46 (Consolidation of Variable Interest Entities) of approximately $290 million primarily relating to deficit net worth at Trilegiant.

With the conclusion of the war in Iraq, Fitch expects, at a minimum, that travel-related businesses will begin to improve as the travel industry hits its peak season in the summer. Travel distribution should benefit from the peak travel season as well, but a longer-term concern is the impact of currently proposed regulatory changes in the US that would allow airlines to provide exclusive fares to the airline-owned GDS companies. Mitigating this concern is that more than 60% of Galileo's 2002 revenue was generated outside the US where airlines are already allowed to offer exclusive fares. Also, in the latter part of 2003 and into 2004, the car rental business could realize higher profits from synergies depending on the success of the integration of Avis and Budget.
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Publication:Business Wire
Geographic Code:1USA
Date:Jun 4, 2003
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