Hertz seeks unusual $1bn share sale while in bankruptcy

Hertz, the car rental group facing bankruptcy, is looking to sell up to $1bn in stock to take advantage of frenzied trading in its shares, in an unprecedented move for a company whose solvency is in doubt.

The proposed cash infusion, outlined in a filing on Thursday, would help fund the company’s reorganisation process and would come in lieu of the traditional senior loan most companies under Chapter 11 protection tap.

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

Hertz shares reached $5.53 on Monday, implying a market value of above $700m, even as its bonds were trading at highly distressed levels below 40 cents on the dollar. At such levels, the stockholders are typically wiped out.

Line chart of Rebased showing Hertz stock gyrates since bankruptcy filing

The heightened trading and rise in the stock price “present a unique opportunity for the debtors to raise capital on terms that are far superior to any debtor-in-possession financing”, the company wrote, noting that equity would be free of covenants that typically shackled companies in the Chapter 11 process. 

The company has $18bn of debt largely in bonds secured against its hundreds of thousands of vehicles. A sharp decline in used car prices has forced it to make extra payments to bondholders just as its cash generation shrivelled.

Hertz believes it has roughly 250m unissued shares that it wishes to market through Jefferies, its investment bank. 

A filing to issue new stock would include a disclosure stating that “an investment in Hertz’s common stock entails significant risks, including the risk that the common stock could ultimately be worthless”, the company wrote.

One veteran lawyer following the situation believed the gambit was unprecedented, saying he had seen nothing like it in a 30-year career. “Hertz is in bankruptcy trying to sell stock and at the same time is saying they can’t afford leases on its cars,” referring to another company motion on Thursday filed that sought to reject leases on 144,000 vehicles.

Line chart of Number of Robinhood users with Hertz shares (1,000s) showing Retail investors plough into Hertz stock despite bankruptcy

The bankruptcy court in Delaware is set to consider the motion on Friday afternoon. The attorney representing the company did not immediately respond to a request for comment.

Shares in Hertz lost four-fifths of their value after the group filed for bankruptcy but recovered after a wave of retail investor interest in the downbeat stock. The buying frenzy led the stock to gain more than 800 per cent by Monday from the low on May 26, the first trading day after its Chapter 11 filing. Since then, the stock has sagged by nearly two-thirds and closed on Thursday at $2.06, still far above the $0.56 nadir it hit last month. Other distressed companies including JC Penney, Whiting Petroleum and Chesapeake Energy experienced similar volatility.

The phenomenon has confounded Wall Street portfolio managers and has shone a spotlight on the stock market speculation among retail investors that has helped fuel the market rally since late March.

Hertz is now one of the most held stocks by users of Robinhood, the free trading app. The number of users owning the stock on the platform has tripled since the car rental group declared bankruptcy.

The speculation in Hertz and other companies on the verge of bankruptcy is a “very similar dynamic to what we saw in bitcoin and what we saw in the dotcom boom and bust”, said Max Gokhman, head of asset allocation for Pacific Life Fund Advisors. The activity reflects “a sense of buying anything that is down during the coronavirus on the expectation that these stocks won’t go bankrupt”.