Summary
- HTZ has seen an over 1,000% ride in share price from a low of $0.40 after filing bankruptcy to over $5.50 per share.
- All creditors must be paid par before equity can earn value.
- Bond prices in unsecured are now hovering near 30 to 40 cents on the dollar, signalling virtually no hope for equity.
- HTZ also acknowledged in a controversial equity sale on Monday that equity is inherently worthless unless somewhat of a miracle situation occurs.
Hertz (HTZ) has filed for voluntary Chapter 11 bankruptcy, allowing the company to continue operations as a debtor-in-possession since the filing on May 22. Yet shares haven taken a wild roller-coaster ride from $0.40 to over $5.50 even as shares are worthless, visible within bond prices and even acknowledged by Hertz in its very controversial approval for an up to $1 billion offering of equity.
Per automatic stay in Chapter 11, Hertz is not forced to sell off its fleet, and will only do so should it deem it necessary and should it fit the provisions listed in its bankruptcy filing. Hertz has $6.0 billion in indebtedness and $13.54 billion in third-party indebtedness, of which a large majority of third-party are multiple series of four tranches of rental car asset backed notes.
Hertz has still just below of 100 days of exclusivity to create its reorganization plan, but could extend that period of exclusivity to up to 18 months as long as the company is proceeding with the "best interests" of its creditors. For any plan to be confirmed, it must show:
Feasibility – will Hertz be able to generate enough revenues in the longer term picture to be able to provide for the recovery of its creditors?
Best interests – will Hertz creditors receive equal or more value under this plan than during a Chapter 7 liquidation?
Consent – will the impaired class(es) approve the plan?
Good faith – are there any behind-the-scenes dealings to favor one class over another?
Fair and equitable (if a plan is rejected) – will secured creditors receive the full value of their collateral? And equity must give up ownership rights until the creditors receive value in full.
Addressing feasibility: air travel and associated car rentals plummeted, forcing the bankruptcy; so how long will it take for Hertz to recover its revenue streams under its new planned operating structure? Hertz is looking to manage its expenses in line with new demand trajectories by
reducing planned fleet levels through vehicle sales and by canceling fleet orders, consolidating off-airport rental locations, deferring capital expenditures and cutting marketing spend, and implementing furloughs and layoffs of 20,000 employees, or approximately 50% of its global workforce.
So Hertz is looking to reduce its fleet and shift away from off-airport locations – although it does align with cost cutting, it also dampens revenue potentials by reducing the availability of vehicles and locations to rent for potential customers. In addition, air travel is not expected to recover to pre-pandemic levels for a couple of years, which could further prolong the period in which Hertz can work towards showing revenue benefits.
Addressing "fair and equitable" (which typically is not needed unless the impaired creditors vote against the proposed plan): will equity holders get anything? Most likely not, as in Hertz basically wishing a miracle for that outcome to happen. Equity is the absolute bottom of the totem pole when it comes to bankruptcy proceedings, and Hertz knows this full and well, even as it dumped $500 million in shares on to the market on Monday:
