Avis Budget Rental Car Funding (AESOP) LLC, Series 2019-3 -- Moody's downgrades Avis Budget's rental car ABS

Rating Action: Moody's downgrades Avis Budget's rental car ABS

Global Credit Research - 10 Jul 2020

New York, July 10, 2020 -- Moody's Investors Service (Moody's) has downgraded the ratings on 32 tranches of rental car asset-backed securities (ABS) issued by Avis Budget Rental Car Funding, LLC (AESOP or the issuer). The issuer is an indirect subsidiary of the transaction sponsor and single lessee, Avis Budget Car Rental, LLC (ABCR, B2 negative). ABCR, a subsidiary of Avis Budget Group, Inc., is the owner and operator of Avis Rent A Car System, LLC (Avis), Budget Rent A Car System, Inc. (Budget), Zipcar, Inc. and Payless Car Rental, Inc. (Payless). AESOP is ABCR's rental car securitization platform in the U.S. The collateral backing the notes is a fleet of vehicles and a single lease of the fleet to ABCR for use in its rental car business.

Moody's actions on the rental car ABS are prompted by (1) the challenging market conditions in the rental car market, including the severe drop in demand and the heightened uncertainty around ABCR's ability to honor its full lease payment obligation, (2) uncertainty around the value of used vehicles owing to a resurgence of COVID-19, the volume of sales from all US rental car companies' in their efforts to de-fleet, among other factors, and (3) the continued decrease in program vehicles in the securitized fleet. Moody's downgraded these ratings and placed them under review for further downgrade on 27 April 2020. Today's actions conclude the review.

COMPLETE RATING ACTIONS

Issuer: Avis Budget Rental Car Funding (AESOP) LLC, Series 2015-1

Series 2015-1 Class A, Downgraded to Aa2 (sf); previously on Apr 27, 2020 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Series 2015-1 Class B, Downgraded to Baa2 (sf); previously on Apr 27, 2020 Downgraded to A2 (sf) and Remained On Review for Possible Downgrade

Issuer: Avis Budget Rental Car Funding (AESOP) LLC, Series 2015-2

Series 2015-2 Class A, Downgraded to Aa2 (sf); previously on Apr 27, 2020 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Series 2015-2 Class B, Downgraded to Baa2 (sf); previously on Apr 27, 2020 Downgraded to A2 (sf) and Remained On Review for Possible Downgrade

Issuer: Avis Budget Rental Car Funding (AESOP) LLC, Series 2016-1

Series 2016-1 Class A, Downgraded to Aa2 (sf); previously on Apr 27, 2020 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Series 2016-1 Class B, Downgraded to Baa2 (sf); previously on Apr 27, 2020 Downgraded to A2 (sf) and Remained On Review for Possible Downgrade

Issuer: Avis Budget Rental Car Funding (AESOP) LLC, Series 2016-2

Series 2016-2 Class A, Downgraded to Aa2 (sf); previously on Apr 27, 2020 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Series 2016-2 Class B, Downgraded to Baa2 (sf); previously on Apr 27, 2020 Downgraded to A2 (sf) and Remained On Review for Possible Downgrade

Issuer: Avis Budget Rental Car Funding (AESOP) LLC, Series 2017-1

Series 2017-1 Fixed Rate Rental Car Asset Backed Notes, Class A, Downgraded to Aa2 (sf); previously on Apr 27, 2020 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Series 2017-1 Fixed Rate Rental Car Asset Backed Notes, Class B, Downgraded to Baa2 (sf); previously on Apr 27, 2020 Downgraded to A2 (sf) and Remained On Review for Possible Downgrade

Series 2017-1 Fixed Rate Rental Car Asset Backed Notes, Class C, Downgraded to Ba2 (sf); previously on Apr 27, 2020 Downgraded to Ba1 (sf) and Placed Under Review for Possible Downgrade

Issuer: Avis Budget Rental Car Funding (AESOP) LLC, Series 2017-2

Series 2017-2 Fixed Rate Rental Car Asset Backed Notes, Class A, Downgraded to Aa2 (sf); previously on Apr 27, 2020 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Series 2017-2 Fixed Rate Rental Car Asset Backed Notes, Class B, Downgraded to Baa2 (sf); previously on Apr 27, 2020 Downgraded to A3 (sf) and Remained On Review for Possible Downgrade

Series 2017-2 Fixed Rate Rental Car Asset Backed Notes, Class C, Downgraded to Ba2 (sf); previously on Apr 27, 2020 Downgraded to Ba1 (sf) and Placed Under Review for Possible Downgrade

Issuer: Avis Budget Rental Car Funding (AESOP) LLC, Series 2018-1

Series 2018-1 Fixed Rate Rental Car Asset Backed Notes, Class A, Downgraded to Aa2 (sf); previously on Apr 27, 2020 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Series 2018-1 Fixed Rate Rental Car Asset Backed Notes, Class B, Downgraded to Baa2 (sf); previously on Apr 27, 2020 Downgraded to A3 (sf) and Remained On Review for Possible Downgrade

Series 2018-1 Fixed Rate Rental Car Asset Backed Notes, Class C, Downgraded to Ba2 (sf); previously on Apr 27, 2020 Downgraded to Ba1 (sf) and Placed Under Review for Possible Downgrade

Issuer: Avis Budget Rental Car Funding (AESOP) LLC, Series 2018-2

Series 2018-2 Fixed Rate Rental Car Asset Backed Notes, Class A, Downgraded to Aa2 (sf); previously on Apr 27, 2020 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Series 2018-2 Fixed Rate Rental Car Asset Backed Notes, Class B, Downgraded to Baa2 (sf); previously on Apr 27, 2020 Downgraded to A3 (sf) and Remained On Review for Possible Downgrade

Series 2018-2 Fixed Rate Rental Car Asset Backed Notes, Class C, Downgraded to Ba2 (sf); previously on Apr 27, 2020 Downgraded to Ba1 (sf) and Placed Under Review for Possible Downgrade

Issuer: Avis Budget Rental Car Funding (AESOP) LLC, Series 2019-1

Series 2019-1 Fixed Rate Rental Car Asset Backed Notes, Class A, Downgraded to Aa2 (sf); previously on Apr 27, 2020 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Series 2019-1 Fixed Rate Rental Car Asset Backed Notes, Class B, Downgraded to Baa2 (sf); previously on Apr 27, 2020 Downgraded to A3 (sf) and Remained On Review for Possible Downgrade

Series 2019-1 Fixed Rate Rental Car Asset Backed Notes, Class C, Downgraded to Ba2 (sf); previously on Apr 27, 2020 Downgraded to Ba1 (sf) and Placed Under Review for Possible Downgrade

Issuer: Avis Budget Rental Car Funding (AESOP) LLC, Series 2019-2

Series 2019-2 Rental Car Asset Backed Notes, Class A, Downgraded to Aa2 (sf); previously on Apr 27, 2020 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Series 2019-2 Rental Car Asset Backed Notes, Class B, Downgraded to Baa2 (sf); previously on Apr 27, 2020 Downgraded to A3 (sf) and Remained On Review for Possible Downgrade

Series 2019-2 Rental Car Asset Backed Notes, Class C, Downgraded to Ba2 (sf); previously on Apr 27, 2020 Downgraded to Ba1 (sf) and Placed Under Review for Possible Downgrade

Issuer: Avis Budget Rental Car Funding (AESOP) LLC, Series 2019-3

Series 2019-3 Rental Car Asset Backed Notes, Class A, Downgraded to Aa2 (sf); previously on Apr 27, 2020 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Series 2019-3 Rental Car Asset Backed Notes, Class B, Downgraded to Baa2 (sf); previously on Apr 27, 2020 Downgraded to A3 (sf) and Remained On Review for Possible Downgrade

Series 2019-3 Rental Car Asset Backed Notes, Class C, Downgraded to Ba2 (sf); previously on Apr 27, 2020 Downgraded to Ba1 (sf) and Placed Under Review for Possible Downgrade

Issuer: Avis Budget Rental Car Funding (AESOP) LLC, Series 2020-1

Series 2020-1 Rental Car Asset Backed Notes, Class A, Downgraded to Aa2 (sf); previously on Apr 27, 2020 Downgraded to Aa1 (sf) and Placed Under Review for Possible Downgrade

Series 2020-1 Rental Car Asset Backed Notes, Class B, Downgraded to Baa2 (sf); previously on Apr 27, 2020 Downgraded to A3 (sf) and Remained On Review for Possible Downgrade

Series 2020-1 Rental Car Asset Backed Notes, Class C, Downgraded to Ba2 (sf); previously on Apr 27, 2020 Downgraded to Ba1 (sf) and Placed Under Review for Possible Downgrade

RATINGS RATIONALE

Moody's actions on the rental car ABS are prompted by (1) the challenging market conditions in the rental car market, including the severe drop in demand and the heightened uncertainty around ABCR's ability to honor its full lease payment obligation, (2) uncertainty around the value of used vehicles owing to a resurgence of COVID-19, the volume of sales from all US rental car companies' in their efforts to de-fleet, among other factors, and (3) the continued decrease in program vehicles in the securitized fleet. The car rental sector has been one of the sectors most significantly affected by the coronavirus-driven credit shock given its heavy dependence on air travel and on the sale of used vehicles. While conditions in the used car market are presently constructive, air travel has fallen precipitously. As a result, Moody's believes that (1) the likelihood of ABCR affirming its lease payment obligation in its entirety in the event of a Chapter 11 bankruptcy has decreased, (2) the uncertainty in the values of used vehicles and therefore our value haircut being applied to non-program vehicles upon ABCR's default has increased, and (3) the percentage of program vehicles in the underlying fleet collateral will likely decrease further owing to ABCR's efforts to continue de-fleeting.

If ABCR were to file for bankruptcy, Moody's continues to assume that the company would be more likely to reorganize under a Chapter 11 filing, as a reorganization would likely realize significantly more value as an ongoing business concern than a liquidation of its assets under a Chapter 7 filing. Moody's view considers the strength of the ABCR brand (one of the three major car rental companies in North America) and the expected eventual recovery of the rental car industry.

Moody's now believes that there is a lower likelihood that ABCR will accept its lease payment terms in its entirety in the event of a Chapter 11 bankruptcy. While Moody's recognizes the strategic importance of the ABS financing platform to ABCR's operation, the company's lease payment obligations to the trust are high, considering the relatively low utilization of the fleet and ABCR's need to continue to de-fleet in the second half of 2020. ABCR has historically operated at utilization rates near the 70%-80% range, with current utilization considerably below historical levels, although improving from its low in April.

Moody's expects ABCR to continue executing on its plan to reduce the size of its rental fleet in response to the pandemic, notably the continued severe downturn in global air travel, while increasing fleet utilization to turn cash flow positive in the second half of the year. The severe drop in air travel will contribute to a sizable cash outflow as ABCR contends with the unprecedented sharp drop in rental demand, and the need to rapidly reduce the size of its car rental fleet.

Moody's notes that a significant portion of ABCR's rentals depend on travel, both business and leisure at on-airport and off-airport retail locations. Global air passenger demand will likely remain severely depressed in 2021 and a substantial recovery before 2023 appears unlikely. Moody's expects global air travel to contract by approximately 70% during 2020, and 2021 passenger travel to fall 35% to 55% below those of 2019. In the meantime, ABCR has begun to de-fleet in a measured manner and continues to execute on its de-fleeting strategy. In the second quarter of 2020, ABCR reduced its fleet size by 8% from the first quarter.

On 2 July 2020, Moody's confirmed ABCR's CFR at B2 with a negative outlook, prompted by the better-than-expected pricing and volume environment in the US used car market over the May/June time period, the related progress ABCR is making in reducing the size of its rental fleet in response to the coronavirus outbreak, and a liquidity position that is adequate in advance of the severe downturn that we anticipate in air travel during 2020 and 2021. The ratings reflect Moody's view that although ABCR is one of the three leading players in the US car rental sector, it faces considerable competitive challenges within the current environment.

Today's downgrades of the ABS are also driven by an increase in Moody's assumed mean haircut to the values of non-program vehicles upon sponsor default. The increase reflects the decline in used car prices during the pandemic, and the continued uncertainty around used car prices due to the potential negative impact of a prolonged resurgence or a second wave of COVID-19. The increase also reflects the negative effect on used vehicle prices of a potential oversupply stemming from several rental car companies continuing to de-fleet in the coming months, including the distressed condition and evolving fleet disposition strategy of another large market player in the sector which could be disruptive to the pricing in the used car market.

Moody's also notes that ABCR has been able to de-fleet at a more controlled pace so far, and in recent weeks, the market for used cars has gradually recovered from the severe contraction in late March through May. According to J.D. Power, wholesale auction sales volumes reached around 108% of the company's pre-COVID-19 expectations and prices reached around 107% of the company's pre-COVID-19 expectations as of the week ending 28 June 2020.[1] During late March and into April and May, the normally quite liquid and large used car market contracted at an unprecedented pace given the closure of most auctions and other sales channels.

The downgrades also reflect Moody's expectation for a lower percentage of program vehicles in the securitized fleet. The fleet composition has shifted to a lower portion of program vehicles at 13.3% as of 30 May 2020, down from 29.1% a year earlier. In recent months, ABCR has breached a concentration limit pursuant to the ABS master trust governing document requiring at least 85% of non-program vehicles. The net book value of the excess non-program vehicles is not included in the asset base. Moody's believes ABCR may choose to continue putting program vehicles back to manufacturers at pre-determined prices in an effort to de-fleet, which would further decrease the percentage of program vehicles in the fleet and result in the net book value of more non-program vehicles being excluded from the asset base

The ratings on the notes are supported by:

(1) available credit enhancement, which consists of subordination and over-collateralization, to protect investors against a meaningful decline in the value of the underlying vehicles (46%-51% credit enhancement behind the Class A notes, 31%-32% enhancement behind the Class B notes and 20%-21% enhancement behind the Class C notes as of 30 May 2020) ,

(2) the credit quality of the collateral in the form of rental fleet vehicles, which ABCR uses in its rental car business under brand names Avis, Budget and Payless,

(3) the credit quality of ABCR as lessee and payment guarantor and of the OEMs that guarantee the prices of program vehicles,

(4) the low likelihood of a Chapter 7 liquidation, along with the still high likelihood of lease acceptance in the event of a Chapter 11 reorganization, in addition to the progress ABCR has already made on de-fleeting in a controlled manner,

(5) the amount of required liquidity in the form of cash and/or a letter of credit sized at roughly six months of interest due on the notes, plus trust expenses,

(6) the track-record, experience and expertise of ABCR as the servicer of the rental fleet and the administrator for the issuer, and

(7) the transaction structure, and other qualitative considerations.

The rapid spread of the coronavirus outbreak, the government measures put in place to contain it and the deteriorating global economic outlook, have created a severe and extensive credit shock across sectors, regions and markets. Our analysis has considered the effect on the performance of corporate assets from the collapse in US economic activity in the second quarter and a gradual recovery in the second half of the year. However, that outcome depends on whether governments can reopen their economies while also safeguarding public health and avoiding a further surge in infections. As a result, the degree of uncertainty around our forecasts is unusually high. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

Below are the assumptions Moody's applied in the analysis of this transaction:

Risk of sponsor default: Moody's assumed a 60% decrease in the probability of default (from Moody's idealized default probability tables) implied by the B2 rating of the sponsor. This decrease reflects Moody's view that, in the event of a bankruptcy, ABCR would be more likely to reorganize under a Chapter 11 bankruptcy filing, as it would likely realize more value as an ongoing business concern than it would if it were to liquidate its assets under a Chapter 7 filing. Furthermore, given the sponsor's competitive position within the industry and the size of its securitized fleet relative to its overall fleet, the sponsor is still likely to affirm its lease payment obligations in order to retain the use of the fleet and stay in business. Moody's arrives at the 60% decrease assuming an 80% probability that ABCR would reorganize under a Chapter 11 bankruptcy and a 75% probability (90% assumed previously) that ABCR would affirm its lease payment obligations in the event of a Chapter 11 bankruptcy.

Disposal value of the fleet: Moody's assumed the following haircuts to the net book value (NBV) of the vehicle fleet:

Non-Program Haircut upon Sponsor Default -- Mean: 19% - 25%

Non-Program Haircut upon Sponsor Default -- Standard Deviation: 6%

Fixed Program Haircut upon Sponsor Default: 10%

Additional Fixed Non-Program Haircut upon Manufacturer Default: 20%

Fleet composition -- Moody's assumed the following fleet composition (based on NBV of vehicle fleet):

Non-program Vehicles: 90%

Program Vehicles: 10%

Non-program Manufacturer Concentration (percentage, number of manufacturers, assumed rating):

Aa/A Profile: 20%, 2, A3 Baa Profile: 60%, 3, Baa3 Ba/B Profile: 20%, 1, B1 Program Manufacturer Concentration (percentage, number of manufacturers, assumed rating): Aa/A Profile: 0%, 0, A3 Baa Profile: 80%, 2, Baa3 Ba/B Profile: 20%, 1, B1

Manufacturer Receivables: 0%; receivables distributed in the same proportion as the program fleet (Program Manufacturer Concentration and Manufacturer Receivables together should add up to 100%)

Correlation: Moody's applied the following correlation assumptions:

Correlation among the sponsor and the vehicle manufacturers: 10%

Correlation among all vehicle manufacturers: 25%

Default risk horizon -- Moody's assumed the following default risk horizon:

Sponsor: 5 years Manufacturers: 1 year

A fixed set of time horizon assumptions, regardless of the remaining term of the transaction, is used when considering sponsor and manufacturer default probabilities and the expected loss of the related liabilities, which simplifies Moody's modeling approach using a standard set of benchmark horizons.

Detailed application of the assumptions are provided in the methodology.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was "Moody's Global Approach to Rating Rental Fleet Securitizations" published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1232483. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Factors that would lead to an upgrade or downgrade of the ratings:

Up

Moody's could upgrade the ratings of the notes as applicable if, among other things, (1) the credit quality of the lessee improves, (2) the credit quality of the pool of vehicles collateralizing the transaction strengthens, as reflected by a stronger mix of program and non-program vehicles and stronger credit quality of vehicle manufacturers, and (3) sustained improvement in the prices and sales of non-program vehicles owing to higher demand and successful containment of the spread of COVID-19.

Down

Moody's could downgrade the ratings of the notes if, among other things, (1) the credit quality of the lessee weakens, (2) an increase in the likelihood of a sudden disposition of the underlying vehicles in another depressed used-vehicle market due to a continued resurgence or a second wave of COVID-19, (3) the credit quality of the pool of vehicles collateralizing the transaction weakens, as reflected by a weaker mix of program and non-program vehicles and weaker credit quality of vehicle manufacturers, (4) sharper than expected declines in vehicle prices of non-program vehicles owing to sustained weakness in the demand for used vehicles and prolonged disruptions to used-car sales channels, or (5) the tail periods, particularly for the 2015-2 notes (2015-1 notes have amortized considerably) that mature in 2021, become insufficient because US sales channels shut down again for a prolonged period and therefore vehicle disposition proceeds may be insufficient to repay the notes.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

In rating this transaction, Moody's used a cash flow model to model cash flow stress scenarios to determine the extent to which investors would receive timely payments of interest and principal in the stress scenarios, given the transaction structure and collateral composition.

Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] Used Market Update, J.D. Power, 08-Jul-2020

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Arti Mattu AVP-Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Tracy Rice VP - Senior Credit Officer Structured Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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Additional terms for Japan only: Moody's Japan K.K. ("MJKK") is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody's SF Japan K.K. ("MSFJ") is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ("NRSRO"). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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