One of the interesting trends in trading this year has been the rise of bankruptcy stocks. In the past, when a company filed bankruptcy, its stock usually went to zero almost immediately. This year, however, many such zombie companies have continued to trade at a fevered pitch for far longer than you might reasonably expect. Hertz (OTCMKTS:HTZGQ) is one such example. Hertz filed for bankruptcy this spring in the wake of the novel coronavirus. You’d normally expect Hertz stock to quickly disappear from the scene.
Instead, Hertz’ shares soared to $6 each at one point after the bankruptcy filing. In fact, there was so much excitement among Robinhood and retail traders that Hertz tried to raise more money issuing new shares even after it was already insolvent. Now, however, as the bankruptcy drags on and it has become clear that current shareholders aren’t going to get anything, reality is finally setting in. The stock has settled back down to $1 per share and has been delisted from the New York Stock Exchange. And, let’s be clear, it’s only going to get worse from here.
Don’t Mistake Funding For A Recovery
Hertz stock has surged on several occasions in recent months. Often, these moves in the stock have come on news of Hertz arranging more financing. For example, on October 16, Hertz stock soared almost 150% in a single day because of news on its debtor-in-possession (DIP) financing agreement.
The DIP arrangement will provide Hertz with an additional $1.6 billion in funding. This, in turn, will help cover Hertz’ operating losses and give it cash for updating its vehicle fleet. Though the pandemic rages on, Hertz can’t just stop spending money until customers come back. Rather, it still has to pay employees and maintain and care for its fleet of vehicles so that there is an operational business whenever travel does get going again.
However, this debt doesn’t come free. In fact, it’s extremely expensive, as it bears a greater than 7% interest rate. And that’s not even the biggest problem. With DIPs, essentially, the lender now owns the assets and the company continues to operate them for the new creditors’ benefit. This is better than having to liquidate everything immediately in that it saves jobs and may allow the brand retain some value for new ownership. But it’s exceptionally uncommon for common stockholders to maintain any ownership in the business once the DIP lenders have taken control.
Stock Delisted And More Losses
Hertz made news earlier this summer when it attempted to pull off the unprecedented move of issuing new stock when it was already in bankruptcy. This was, needless to say, unusual. Regulators ultimately blocked the maneuver; it was simply too high risk to issue stock to the public in an already bankrupt firm with no meaningful prospects of saving common shareholders. Hertz’ own filing disclosed the fact that the new stock was likely to end up worthless.
You might have imagined that Hertz stock would quietly disappear after that. But it took awhile for the show to wind down. It wasn’t until October 29 that the New York Stock Exchange finally delisted Hertz shares. There were delays with delisting firms due to Covid-19, but now the stock exchanges are catching up. Hertz stock dropped significantly following that, as you’d expect. Without being listed on a major exchange, trading volume tends to dry up, which leads to a slumping share price.
Adding to that, the company reported its quarterly results on Monday. Hertz lost another $222 million for the quarter. Additionally, revenues slumped 56%; the economic reopening thus far hasn’t been nearly enough to get Hertz back on the road. And with the DIP lenders funding Hertz now, there won’t be much of anything left to support the common stock by the time business conditions really start to normalize.
Hertz Stock Verdict
Traders may be hoping that Hertz can be the next Luckin Coffee (OTCMKTS:LKNCY). Earlier this year, Luckin admitted to massive accounting fraud, and the stock collapsed. The Nasdaq delisted the firm’s shares and many of the key executives left. Shares slumped to just 95 cents. But now they’re back up to $5, even as they still trade on the pink sheets. Speculators are willing to give Luckin the benefit of the doubt.
So why not Hertz as well? Here’s where the parallel breaks down: Luckin had no meaningful amount of debt. And, aside from leases for its cafes, Luckin didn’t have a ton of fixed costs — so it could carry on its business even with all the terrible headlines. Hertz, by contrast, needs billions of dollars to merely be operational. Cars aren’t cheap, and they depreciate quickly. Hertz can’t just wait for the coronavirus to blow over; it owes billions of dollars that have to be dealt with now.
This is why Hertz stock will not have a similar comeback to some other stocks that have fallen sharply. Hertz simply needs more capital immediately, and there’s no way to obtain it that would leave current Hertz shareholders in tact.
Take General Motors (NYSE:GM) for example. That company went bust during the financial crisis of 2008. The old General Motors stock turned into Motors Liquidation Company and eventually ended up worthless. While Motors Liquidation had no value, the debt-holders got stock in new GM, which is what you see on the stock market now. Hertz is likely to suffer a similar fate; the company may still exist in the future but people owning current Hertz stock won’t own anything.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.