Hertz, the Superstar in Rent-a-Car, filed for bankruptcy on May 22nd. That’s when the fun began. Hertz stock, henceforth to be known as HTZ, fell to 56 cents on May 26th, the business day after its Chapter 11 filing. Then, HTZ ascended like Icarus. It hit a high of 6.25 and closed at 5.53 on June 8th. Shortly thereafter I wrote about it in The Spin, my newsletter. (If you don’t subscribe, you are missing out.) I talked about HTZ bond prices, the bonds’ senior claim to the equity in bankruptcy and the likelihood that HTZ stock was worthless. I thought I was done, but no. It got better.
The HTZ debtors, who now control the company, took note of the reanimation of the firm’s equity. They went before the bankruptcy judge and asked permission to sell about 247 million shares of common stock in the bankrupt company. This is chutzpah! (For those who don’t know, chutzpah is nerve, brass balls level nerve. The classic example is someone who murdered their parents asking the court for leniency because they’re an orphan.) The thing about chutzpah is that it works! The judge agreed.
Neither I nor anyone else can hark back to a sale of equity by a bankrupt company. Why would we? The equity value of bankrupt companies is almost always zero. That is no different in this case. If the equity is to have any value, the bonds must be paid off in full. That is the way bankruptcy works, at least in the US. In some other countries, making similar assumptions about the priority of claims might not be a good idea. Trust me, I know.
If you ever think about getting involved in the stock of a problematic company like HTZ, you need to:
- Get a sense of the capital structure. Equity is lowest on the totem pole. What stands ahead of you?
- Find out where the bonds, if any, are trading. Price information is the gold standard. It tells you a huge amount about what is really going on. Distressed bond investors do their homework, unlike many equity “investors”.
Don’t be this guy:
Leaving his grammatical error aside, our Canadian friend is citing someone who pulled their argument from a place where the sun don’t shine. HTZ’s car fleet is pledged, a fancy pants way of saying that the cars are collateral for asset backed securities (ABS). It gets better. The cars collateralizing the ABS dropped in value due to the lack of travel during the pandemic. That triggered what was effectively a margin call. The company needed to hand over more dough to the ABS investors to maintain the value of the collateral. Hmm, no revenue. Better file.
It’s the day traders who bought a bankrupt stock who are about to get run over.
Now, consider the following statement from Moody’s, the credit rating agency:
The C rated unsecured domestic obligations reflects a recovery rate that could be below 35% after first- and second-lien claims are settled.
The above mentioned C rated securities are HTZ’s senior notes. Despite their “Senior” designation, they are just ahead of the caboose, i.e., the equity. Moody’s thinks they’re worth 35 cents on the dollar. If Moody’s is right, the $2.7 billion in senior notes are worth $945 million, leaving at least $1.755 billion to be made up before the stock holders see a dime. I say “at least” because there are loans and secured bonds in line ahead of the senior notes.
I am sad to report that the stock sale was suspended on June 18th. The SEC, in its wisdom, has decided that they have issues with the disclosures.
“Although we cannot predict how our common stock will be treated under a plan, we expect that common stock holders would not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured and unsecured indebtedness (which is currently trading at a significant discount), are paid in full, which would require a significant and rapid and currently unanticipated improvement in business conditions to pre-COVID-19 or close to pre-COVID-19 levels,” the filing said.
“There is a significant risk that the holders of our common stock, including purchasers in this offering, will receive no recovery under the Chapter 11 cases and that our common stock will be worthless.”
are not clear enough.