You could probably make a whole laundry list of bizarre things which have transpired this year. Add to that list, Hertz (OTCMKTS:HTZGQ) stock climbing 150% on Oct. 16 because of its debtor-in-possession (DIP) loan. Speculators and irrational traders believe that the arrangement is likely to kickstart a comeback. The reality is that Hertz stock is virtually worthless, and the company is at its new creditors’ mercy.
Hertz secured a $1.65 billion DIP loan last month, which comes with a hefty 7% interest rate. The loan proceeds will be used for meeting its working capital requirements and its operational expenses.
Additionally, the proceeds will also be used for purchasing new and used vehicles in boosting its fleet. Management believes that the DIP loan could steer it out of the company’s mess currently. Unfortunately, The New York Stock Exchange did not share the same opinion, de-listing the stock on Oct. 30.
Hertz stock is now a pink sheet with little or nothing left for potential and existing investors.
The NYSE suspended trading of Hertz Global and announced it was de-listing its shares effective Oct. 30. Many would argue that the decision was a long time coming, considering the company filed for bankruptcy back in May. Hertz appeal was rejected, which means that the stock will trade on the over-the-counter market.
Some investors are surprised that the development took place, especially after receiving the approval of its DIP loan. The reality is that the funding can never kickstart a comeback. It enables the company to continue as an essential business while its Chapter 11 negotiations are wrapped up.
The probable outcome would be that the company would emerge as restructured and trade under a different ticker. It would be tough for current stockholders to sell their shares and recover their investment. They would have to scrap their investments in the OTC market.
The Losses Keep on Piling Up
Hertz recently reported its dismal third-quarter results. It picked up from it left off in the past two quarters, posting a net loss of $222 million. Sequentially though, the loss is significantly lower than the past two quarters. Revenues were at $1.3 billion compared to $2.8 billion in the same period last year. Additionally, it made $169 million in profits in the third quarter of 2019. According to the president and CEO Paul Stone:
“Our U.S. Chapter 11 process is progressing well. Recent new funding and commitments of more than $6 billion allow us to continue taking steps to best position our business as a rental-car and fleet-leasing leader through the pandemic and for the future.”
Hertz cut down its international fleet by 51% from the same period last year. With all the belt-tightening measures and new liquidity, it appears as though that the company might be back on track.
However, the reality is that with the new agreement, its lenders now own its assets. Its debt levels are extremely high, and with the loan, it’s going to need a truckload of cash to pay it off. On top of that, the DIP loan comes with a massive 7% interest rate as well.
It’s tough to foresee a scenario where the company’s shareholders would maintain ownership once the new lenders have control.
Final Word on Hertz Stock
Hertz Global is in a mess and getting out of it might be beyond its ability. Irrational investors and speculators will continue to raise false hopes about the stock, which is irrelevant.
With the DIP arrangement, Hertz assets are under the control of its new creditors, diminishing whatever brand equity it had. Dumping Hertz stock is a no-brainer.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.