Hertz (OTCMKTS:HTZGQ) stock should continue to hover around $1 until it ultimately becomes worthless. Investors should not touch the stock, and those who currently hold it should sell it. There doesn’t seem to be any scenario in which it could rise.
The company is undergoing a financial restructuring. That means Hertz will continue to operate, but the shares anyone buys now are going to end up worthless. That’s the important thing to know here: Hertz will continue to rent cars but the current stock is done.
Hertz has had a tumultuous year and began to really grab headlines with its May 22 Chapter 11 bankruptcy. A lot has been written about it since then, but for the purposes of this article I’ll start in mid-October, and highlight events that have occurred. These events strongly indicate that there is nothing left of the company for investors.
Debtor in Possession
Hertz secured what is known as debtor-in-possession financing on Oct. 16. This is significant for investors in that it further closes the window on investors’ ability to make money from Hertz.
Debtor-in-possession financing allows a company in Chapter 11 bankruptcy to fund its operations. This form of financing provides vital liquidity for Hertz in its reorganization but it importantly puts investors farther from being paid by the company. DIP financing has seniority over debt, equity and other claims. Hertz basically said you give us funds, and we’ll allow you to control our assets.
So, holders of Hertz stock (equity) are now further down in the pecking order when the company gets reorganized and current shares go to zero. At that point liquidated assets will be distributed in a seniority based fashion. Stock equity is normally low on the pecking order, and it only became further subjugated at the moment of DIP financing.
Investors Didn’t Do Their Homework
This should have driven shareholders to sell-off shares on Oct. 16 since they became more junior in the pecking order, i.e. less likely to get anything once shares hit zero. But 2020 has been anything but predictable or logical, and shares actually jumped about 150% on Oct. 16.
It must be noted that DIP financing is little more than a form of financing available only to firms in Chapter 11 bankruptcy. Chapter 11 firms reorganize, and in that process their shares become worthless. This company is still on its way to Chapter 11 bankruptcy. And Chapter 11 bankruptcy almost always results in current shares becoming worthless.
My assumption is that all of the buyers simply saw that Hertz had secured $1.65 billion on Oct. 16, and to them this meant that suddenly it had become a company that wasn’t in Chapter 11. I think some investors believed the company could return to its former glory with that $1.65 billion.
I believe they simply didn’t do their homework. DIP financing simply gave another company control over Hertz assets so that Hertz could continue to operate. But, importantly the company is still in Chapter 11 and is going to reorganize. That means all those stocks investors bought on Oct. 16 will end up worthless, which is itself a cautionary tale.
De-Listed from the NYSE
Roughly two weeks after Hertz jumped on DIP financing news, it got de-listed from the NYSE. It appealed the decision, and was quickly rejected. Stocks lost all of the 150% in appreciation from two weeks prior, and then some.
I have to assume that some investors probably did their homework on DIP financing at that time and realized their mistake. But it was too late. The result is that Hertz is now trading over the counter and investors should be even less tempted than before.
Piecemeal Reorganization Marches On
Hertz announced it is selling its wholly-owned fleet management subsidiary on Nov. 25. Donlen, Hertz’s fleet management subsidiary, has been sold to Athene Holding (NYSE:ATH) for an anticipated price of at least $875 million.
Investors should view this as a continued march toward Chapter 11 reorganization, and not as a reason to purchase shares. Thankfully, share prices did not jump on the news. I am hopeful that investors view this as a negative and that markets realize the stock is still slated to become worthless due to Chapter 11.
Verdict On Hertz Stock
I think it’s very clear that I do not recommend buying Hertz stock. Investing requires due diligence. That often means market followers like you and I, who very likely aren’t trained in corporate reorganization, have to learn about such things. I believe investors didn’t in mid-October.
Current shares are going to end up worthless, but Hertz will continue to be a car rental company that is a household name. That’s what happens in Chapter 11, the company continues to operate but the debt structure changes. And that necessarily means that people who buy now will end up holding a worthless asset. Just do the homework.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.