The stock market is mounting a recovery after being pulverized by the crippling effects of the novel coronavirus pandemic. However, some companies haven’t been able to recover and are running on their last legs. Hertz Global Holdings (NYSE:HTZ), has witnessed a massive decline in business activity during the coronavirus-led market slowdown, which has led to it filing a voluntary Chapter 11 bankruptcy on May 22. Since then, Hertz stock has shed half its value.
Typically, bankrupt stocks tend to witness a steep decline in trading activity, but it hasn’t necessarily been the case for Hertz. Investors need to steer clear of the stock and understand that recovery is virtually impossible at this stage. Let’s look at some of the points in more detail.
Nothing for Equity Investors
One of the core issues with the Hertz business model in the current scenario is that it does not own any of the cars in its fleet. Special purpose entities (SPEs) hold these cars which are owned by fixed-income investors. Therefore, the company’s asset base is weak, and it carries $6 billion in debt and $13.5 billion in third-party debt. It’s currently generating zero revenues and with obligated cash expenses of $100 million per week as per its recent filing. This should be enough to steer away from any equity investor.
An interesting development took place a week ago when Hertz filed a motion to reject the leases on 30% of its fleet, which is part of a master lease. The lease covers 494,000 vehicles, and Hertz claims it has a legal right to use them. Therefore, it could “put back” these vehicles in the SPEs and significantly cut costs. Nevertheless, equity investors will get the short end of the stick, if any, in either scenario.
A look at the bond prices shows that the senior secured notes are trading above 75 cents, whereas the unsecured notes are trading at 30 cents to 45 cents. This suggests that the creditors will not be too hopeful for a full recovery. Naturally, the secured creditors will get the first piece of the lie, leaving the unsecured ones in a bit of a doldrum. Equity investors are likely to leave with nothing.
Odd Legal Situation
Hertz recently announced that it was receiving permission to raise approximately $1 billion by selling its shares on the market. This situation is quite puzzling considering how the company has entered into a Chapter 11 bankruptcy protection and is now looking to raise money through selling its stock, which would be worth nothing in the coming months.
The courts stated that no more than 246.775 million shares could be issued for sale, and in response to the ruling, Hertz announced plans to sell up to $500 million of its shares at the prevailing rate on June 15. The massive drop in price from the initial $1 billion is attributable to the restrictions on the number of shares and the fluctuations in the share price.
However, within a few days, Hertz announced that it was foregoing the controversial stock sale following criticism from the Securities and Exchange Commission. It would now have to swallow the bitter pill of taking up a $1 billion loan to fund its business reorganization.
Needless to say, Hertz needs a lot of cash and needs it quickly. Its 13-week cash requirements forecast suggests that through the week of August 21, the company would need roughly $1.28 billion to meet its obligations. These obligations include cash disbursements, rent and concessions, SG&A, Chapter 11 process, and other expenses.
Final Word on Hertz Stock
There is a lot of uncertainty surrounding Hertz stock at this point. As per the management comments in the latest company filings, there is a massive chance that the common stock would be wiped out within the coming months. You would expect the stock to move around due to speculative activity, but apart from that, it’s clear that it’s nearing its end. Therefore, you should avoid the stock at all costs.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University. He does not directly own the securities mentioned above.
