Hertz: Invest Now Or Miss Out?

Hertz Global Holdings Inc. filed for bankruptcy in 2020, and its stock price fell to 56 cents a share. The company's decision to raise cash by selling shares was approved by a judge but later suspended pending review by the U.S. Securities and Exchange Commission. Hertz has about $19 billion in debt, with a significant portion coming from bonds issued to purchase its fleet. The COVID-19 pandemic caused a decline in travel and airport closures, impacting Hertz's revenue. The company also faced challenges due to the drop in demand and prices for used vehicles. As a result, Hertz was forced to file for bankruptcy. While it's tempting to invest in Hertz, it's important to understand the risks associated with investing in a company going through bankruptcy. One of the best investors, Carl Icahn, sold his shares at a loss, recognizing the challenges facing the company. Therefore, it's recommended to avoid buying Hertz stock right now and wait to see how the company restructures.

Hertz's bankruptcy and the risks of investing in a bankrupt company

In 2020, Hertz Global Holdings Inc. filed for bankruptcy, and its stock price plummeted to 56 cents per share. However, investors seeking a bargain began buying the stock, causing the price to surge tenfold at one point. This led Hertz to consider selling more shares to raise capital, a plan that was approved by a judge but later suspended pending review by the U.S. Securities and Exchange Commission (SEC). While investing in bankrupt companies may present opportunities, it is not without risks.

Chapter 11 vs. Chapter 7 Bankruptcy

When a company files for bankruptcy, it typically does so under Chapter 11 or Chapter 7. Chapter 11 bankruptcy allows a company to reorganize and renegotiate its debts while continuing operations. The company may emerge from bankruptcy leaner and more focused, offering investment opportunities. However, there is a risk that old problems resurface, and new shares may be issued, rendering old shares worthless.

Chapter 7 bankruptcy, on the other hand, is a liquidation process where a company ceases operations and its assets are sold to pay off creditors. Shareholders are last in line for repayment and often receive nothing, rendering their shares worthless.

Risks of Investing in a Bankrupt Company

Investing in a company that has filed for bankruptcy carries significant risks. Firstly, there is a possibility that the company's underlying issues remain unresolved, leading to a repeat of the scenario. Additionally, investors may encounter "vulture investors" who buy stakes in the company during bankruptcy and quickly sell their shares after the company emerges from bankruptcy, driving down the share price.

Furthermore, bankruptcy often results in the cancellation of old shares and the issuance of new ones. This means that shareholders may end up with nothing or next to nothing, as their old shares become worthless. Even if the company recovers, there is a slim chance that it will continue using its old shares.

Diversification as a Mitigation Strategy

To mitigate the risks associated with investing in bankrupt companies, it is essential to maintain a diversified portfolio. By investing in a large number of stocks or utilizing investment funds, you can reduce the impact of any single company's bankruptcy on your overall portfolio. A diversified portfolio should ideally include 25 to 30 companies to minimize risk effectively.

Hertz's debt problem and why it matters

Hertz's debt problem is a result of several factors, including its inability to adapt to changing trends, competition from ride-sharing apps, and poor financial policies. The company had been struggling financially even before the COVID-19 pandemic, with losses in the previous four years, including $58 million in 2019.

The root of Hertz's debt problem can be traced back to 2005 when Ford Motor Company sold it to a group of private equity investors in a leveraged buyout transaction (LBO). This deal saddled Hertz with a significant amount of debt, which it never managed to overcome. By December 31, 2019, Hertz had almost 90% debt in its total capital structure, compared to an industry average of 45-50%.

The high level of debt made Hertz vulnerable to competition and market changes. The company's debt obligations were primarily in the form of asset-backed securities (ABS), which are secured by the cars bought by a wholly-owned subsidiary. The complex nature of these transactions made it challenging for Hertz to renegotiate its debt with multiple lenders and diverse classes of securities.

The inability to reach an out-of-court settlement proved costly, as Hertz was forced to file for bankruptcy. The company's demise resulted in layoffs, reduced hours for remaining staff, and losses for creditors and Robinhood day traders who held Hertz stock.

Hertz's debt problem matters because it highlights the risks of excessive reliance on securitization and the challenges of debt renegotiation when a company faces financial difficulties. It also underscores the importance of adapting to changing trends and competition, as well as maintaining a healthy balance sheet with lower debt levels and higher cash balances.

The impact of COVID-19 on Hertz's business

In response to the pandemic, Hertz took several measures to sustain operations and preserve liquidity. The company adjusted fleet levels, negotiated with suppliers to defer new fleet deliveries, and managed costs and reduced capital expenditures. Hertz also implemented employee furlough programs and layoffs, affecting 20,000 employees, or approximately 50% of its global workforce.

Hertz's financial situation was further exacerbated by existing challenges within the rental car industry, including increased competition from ride-sharing and car-sharing companies like Uber, Lyft, and Turo, as well as a rise in telecommuting, which reduced business-related travel.

Despite having over $1 billion in cash on hand, Hertz struggled under the weight of its debt, which had increased to $18.8 billion as of March 31, 2020. The company ultimately filed for bankruptcy, seeking reorganization under Chapter 11 protection to restructure its operations and finances.

The potential for Hertz to liquidate assets and the implications for investors

Hertz's potential liquidation and the implications for investors

Hertz Global Holdings Inc., the rental car giant, declared bankruptcy in 2020, causing its stock price to plummet to 56 cents per share. In a surprising turn of events, amateur investors rushed to buy the stock, causing a tenfold increase in the price at one point. This prompted Hertz to consider raising cash by selling more shares, a move that was approved by a judge. However, the plan was suspended after the U.S. Securities and Exchange Commission (SEC) raised concerns.

As of June 12, 2020, Hertz was considering selling a billion dollars' worth of new shares, despite knowing that the money raised would go towards paying its bills and that investors could potentially lose everything. This move attracted the attention of the SEC, and Hertz ultimately called off the sale.

According to a Wall Street Journal analysis, Hertz could experience one of the biggest drops in asset value in U.S. bankruptcy history. The company is $19 billion in debt and has approximately 700,000 rental cars that are rapidly losing value. With only $1 billion in cash on hand, Hertz is facing a challenging situation.

In the event of liquidation, shareholders are likely to be last in line to recover their claims, behind lawyers and lenders. This means that shareholders could be left with nothing, even if Hertz pulls off a successful reorganization. Additionally, if the company issues new shares as a form of compensation to lenders, the old shares could be cancelled, resulting in a change of ownership.

Hertz's largest shareholder, billionaire Carl Icahn, sold his 39% stake in the company after it filed for bankruptcy, incurring a significant loss of $1.8 billion. This move by a well-informed and influential investor serves as a warning sign for potential investors.

While it is impossible to predict the future of Hertz's stock, it is important for investors to understand the risks associated with investing in a company that has filed for bankruptcy. In most cases, shareholders lose money, and the odds of a successful turnaround are slim. Therefore, investors should carefully consider their options and conduct thorough research before making any investment decisions.

The decision of Carl Icahn, a major stakeholder, to sell his shares

Icahn, a billionaire investor, was the largest shareholder in Hertz, holding a nearly 39% stake in the rental car company. He first invested in Hertz in 2014, with the goal of pushing for changes to improve the company and increase its value. Over the years, he grew his holdings in the company, becoming its largest shareholder. However, the COVID-19 pandemic significantly impacted the travel industry, and Hertz was no exception. The company faced major financial difficulties due to the decrease in travel demand, which ultimately led to its bankruptcy filing.

In May 2020, Icahn decided to sell his entire stake in Hertz at a significant loss. He sold 55.34 million shares at 72 cents per share, resulting in a total loss of nearly $2 billion. While Icahn did not disclose the exact amount of his loss, it is estimated to be around $1.6 billion, excluding his remaining stake in Herc Holdings, an equipment rental company spun off from Hertz in 2016.

Despite the substantial loss, Icahn expressed his continued faith in the future of Hertz. In a regulatory filing, he stated, "I sold my equity position at a significant loss, but this does not mean that I don't continue to have faith in the future of Hertz." He believed that with a plan of reorganization and new capital, Hertz could become a great company again. Icahn also mentioned that he intended to closely follow the company's reorganization and assess different opportunities to support Hertz in the future.

Icahn's decision to sell his shares in Hertz was likely influenced by the company's bankruptcy filing and the impact of the COVID-19 pandemic on the travel industry. As shareholders are typically wiped out during the bankruptcy process, Icahn had little reason to hold onto his shares. By selling his stake, he was able to cut his losses and potentially reinvest the funds elsewhere.

In summary, Carl Icahn's decision to sell his shares in Hertz was likely a result of the company's financial struggles, the impact of the COVID-19 pandemic, and his assessment of the company's future prospects. While Icahn incurred a significant loss on his investment, he remained optimistic about Hertz's potential for a successful reorganization.

Frequently asked questions