Hitching A Ride … To Nowhere, Hertz Global Holdings Has Just Filed For Bankruptcy Protection

Posted By on May 22, 2020

Iconic Hertz, the rental car company founded in 1918 with 12 Ford Model T’s and owner of Hertz, Dollar and Thrifty car-rental brands, has filed for bankruptcy protection. Just 3 months ago on February 20, 2020 Hertz stock was trading at $20.85. Now, puff, its gone. Zippo. Zero. A total wipeout.

Just as bad, this is disastrous news for the automobile companies, the used car market and also wall street’s huge junk bond auto related securitized debt market, just when they don’t need more bad news! But it gets worse, stuck between a rock and a hard place, Hertz has proposed selling more than 30,000 used cars a month through the end of the year in an effort to raise around $5 billion. Inquiring minds wonder ‘sell to whom’. This will effectively bury the used car market and the auto finance companies for the foreseeable future, with virtually all leased vehicles expected to plunge below their lease residual values. It also will then significantly change the structure of many if not all leased car trade ins. Bad for everybody.

Furthermore, it means the rental car companies won’t be buying new cars anytime soon, which will further negatively affect the auto makers because they rely on the rental car companies for a large part of their fleet auto sales business. Oh, and did we say that state, counties and cities are in serious deficit, and in this environment won’t be buying many new fleet vehicles either, surely not until tax revenues recover.

This is Economics 101-B: What Happens When Dominoes Fall.

Car rental company Hertz Global Holdings filed for bankruptcy protection on Friday after its business all but vanished during the coronavirus pandemic and talks with creditors failed to result in needed relief.

Hertz said in a U.S. court filing on Friday that it voluntarily filed for Chapter 11 reorganization. Its international operating regions including Europe, Australia and New Zealand were not included in the U.S. proceedings.

The firm, whose largest shareholder is billionaire investor Carl Icahn, is reeling from government orders restricting travel and requiring citizens to remain home. A large portion of Hertz’s revenue comes from car rentals at airports, which have all but evaporated as potential customers eschew plane travel.

With nearly $19 billion of debt and roughly 38,000 employees worldwide as of the end of 2019, Hertz is among the largest companies to be undone by the pandemic. The public health crisis has also caused a cascade of bankruptcies or Chapter 11 preparations among companies dependent on consumer demand, including retailers, restaurants and oil and gas firms.

U.S. airlines have so far avoided similar fates after receiving billions of dollars in government aid, an avenue Hertz has explored without success.

The Estero, Florida-based company, which operates Hertz, Dollar and Thrifty car-rentals, had been in talks with creditors after skipping significant car-lease payments due in April.

Forbearance and waiver agreements on the missed payments were set to expire on May 22. Hertz has about $1 billion of cash.

The size of Hertz’s lease obligations have increased as the value of vehicles declined because of the pandemic. In an attempt to appease creditors holding asset-backed securities that finance its fleet of more than 500,000 vehicles, Hertz has proposed selling more than 30,000 cars a month through the end of the year in an effort to raise around $5 billion, a person familiar with the matter said.

On May 16, the board appointed executive Paul Stone to replace Kathryn Marinello as CEO. Hertz earlier laid off about 10,000 employees and said there was substantial doubt about its ability to continue as a going concern.

Hertz’s woes are compounded by the complexity of its balance sheet, which includes more than $14 billion of securitized debt. The proceeds from those securities finance purchases of vehicles that are then leased to Hertz in exchange for monthly payments that have risen as the value of cars fall.

Hertz also has traditional credit lines, loans and bonds with conditions that can trigger defaults based on missing those lease payments or failing to meet other conditions, such as delivering a timely operating budget and reimbursing funds it has borrowed.

Hertz earlier signaled it could avoid bankruptcy if it received relief from creditors or financial aid the company and its competitors have sought from the U.S. government. The U.S. Treasury has started assisting companies as part of an unprecedented $2.3 trillion relief package passed by Congress and signed into law.

A trade group representing Hertz, the American Car Rental Association, has asked Congress to do more for the industry by expanding coronavirus relief efforts and advancing new legislation targeting tourism-related businesses.

Even before the pandemic, Hertz and its peers were under financial pressure as travelers shifted to ride-hailing services such as Uber.

To combat Uber, Hertz had adopted a turnaround plan, aiming to modernize its smartphone apps and improve management of its fleet of rental cars.

Hertz traces its roots to 1918, when Walter Jacobs, then a pioneer of renting cars, founded a company allowing customers to temporarily drive one of a dozen Ford Motor Model Ts, according to the company’s website.

Sources: CNBC, The Wall Street Journal

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