Hertz's Equity Offering Amidst Bankruptcy

Is the ride hailing firm Hertz’s attempt to sell $500m equity (in the middle of their bankruptcy) to investors smart business at best or unethical and fraudulent at worst?


The Event: Florida based car rental service Hertz’s bankruptcy filing last month is touted as the biggest in 2020, with over $19bn in debt compared to $21bn in assets to back them. However, what they did recently is simply disquieting.


Bankruptcy Trends: Hertz’s inability to pay lenders for its Asset backed Securities (ABS) facility forced them to file for bankruptcy. Covid-19 has put many companies, especially in dining and real estate, out of business. LATAM Airlines (One of the biggest players in the flying industry), Le Pain Quotidien (PQ New York), Garden Fresh (which owned c.100 restaurants) are just some of the many businesses which shut their doors forever.


Asset Backed Lending is a unique credit facility (an alternative to corporate loans), offered to asset intensive companies. Basically, a firm can raise funds by issuing a security, similar to a bond but backed by its pool of assets (car fleet in this case).


The Saving Grace: The company fortunately did not fall under the Chapter 7 of the Bankruptcy law, which would have required them to liquidate their entire asset position. They filed for Chapter 11 bankruptcy, which would necessitate Hertz to reorganize and renegotiate with the creditors. However, down on luck, the shareholders will be the last in line to get any of the payout. We would be surprised if they even manage to get the crumbs after creditors get paid.


Distasteful Move: Hertz’s recent move was appalling. This week, despite being in the middle of the bankruptcy proceedings, the company tried to sell $500m of equity as a last resort (which could potentially and most likely become worthless). Finally, sense prevailed as the SEC stepped in to stop the offering which was being underwritten by Jefferies.


Last Stray: Few questions emerge out of this bizarre situation. What would have been the outcome had the SEC not stepped in to prevent the offering? Does Jefferies agreeing to underwrite the shares without any concern for investor value say that we haven’t learnt a lesson from 2008?




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