Bankrupt Hertz given approval for unprecedented share sale

Hertz, the bankrupt car hire group, has been given approval to sell up to $1bn of new shares to speculators, taking advantage of a burst of enthusiasm in the stock market for troubled companies.

The unprecedented manoeuvre was approved on Friday by a bankruptcy court, which agreed that the Hertz board was free to sell stock if it deemed it the best way to raise cash to fund the company’s reorganisation. 

“The cost [of equity financing] is significantly less than a loan . . . and the dollars that come in will go to the value of the enterprise as a whole,” said Judge Mary Walrath of the US bankruptcy court in Delaware.

Virtually all companies under bankruptcy protection tap pricey loans heavy with covenants and restrictions in order to keep going during a financial restructuring. An equity fundraising would not normally be an option, since shares typically have negligible value after a bankruptcy reorganisation.

Hertz filed for bankruptcy protection in May after travel restrictions imposed due to the pandemic effectively shut down air traffic around the world, hurting rental activity at airports — the lifeblood of its business.

Its shares were valued below $1 a piece at the time but soared above $6 this week. On Friday they closed at $2.83.

Tom Lauria, the company’s attorney from firm White & Case, said Hertz may try to tap the market as soon as late Friday or Monday.

At the court hearing, held by video, he acknowledged that while travel had slowly picked up in recent weeks, the trading price of Hertz shares was disconnected from fundamentals.

“New platforms for day traders may be facilitating this,” Mr Lauria said, referring to Robinhood, the stock trading app popular with young retail investors. “There are forces at work that us non-financial people, that we can only observe.”

Hertz filed an emergency motion on Thursday seeking the court’s blessing to sell nearly 250m unissued shares. 

Gamco Investors, a fund manager that owned 3 per cent of the existing shares, filed an objection, asking that its current shareholders receive some form of compensation for the dilution they would suffer. The court overruled the objection.

A newly formed committee of unsecured creditors supported the share sale, since the new capital would rank lower than even unsecured liabilities.

“The equity raise is mind-boggling to me,” said David Skeel, a professor of bankruptcy law at the University of Pennsylvania. “I’ve never heard of a firm selling more stock in the middle of a bankruptcy case — it seems like a naked ploy to take advantage of an irrational movement in the market.”

A representative of the US Securities and Exchange Commission speaking at the hearing said that the agency “did not weigh in on the appropriateness of transactions” and that “it was up to the company to comply with securities law”, including around the disclosure of risks.

In a statement provided to the Financial Times, the Hertz lawyer, Mr Lauria, said: “Through vigilance and creativity, Hertz has now gotten the opportunity to turn things around a bit. If successful, it may be able to reinforce its balance sheet by actually capitalising on the truly extraordinary set of circumstances that have followed in the wake of Covid-19.”