With travel coming to a standstill, airlines, hotels and rental car agencies have seen profits decrease at devastating rates. While the impact of the pandemic on airlines has maintained prominence in headlines, rental car agencies have seen devastating impacts quietly in the shadows. Hertz Global Holdings Inc. (HTZ, Financial) is the latest to come under media scrutiny with bankruptcy being their likely fate in the coming weeks.
As of May 8, Bloomberg reported that the situation had come to a three-way standoff between Hertz’s creditors, lenders and investors. Due to pressure from the holders of Hertz’s asset-backed securities, the rental car agency has been given until May 22 to come up with approximately $400 million. Reportedly the company's banks, led by Deutsche Bank AG and Barclays, will have to make a decision between allowing said funding or letting the company file for bankruptcy.
The third party involved, investors including majority stake holder Carl Icahn (Trades, Portfolio), are sitting with an extremely difficult decision to make. Icahn, who has a 39% stake in Hertz, could invest more money into the rental car agency to keep things rolling and attempt to protect his investment. In the last week alone, Hertz’s price has plummeted to $2.43 per share, showing an estimated loss of $35 million for Icahn across his 55 million shares.
The most obvious way for Hertz to raise the required money in this situation would be to sell off its rental fleet, which numbers over 560,000 cars in the U.S. alone, according to Autoweek. For this to be successful, the rental car agency would have to sell off its fleet at close to retail value. This has become increasingly difficult as used vehicle sales have dropped drastically during the pandemic, with Hertz reportedly seeing a 70% decrease in sales in April alone.
If Icahn holds off investing more money, he could watch his investment disappear entirely in the event of bankruptcy as equity holders’ claims would fall behind claims from creditors. Up to this point, holders of Hertz’s asset-backed securities have not pressed for the sale of the vehicles that the company maintains as long as the banks can cover the $400 million. For this to happen, the banks would be making a dangerous bet between used car sales and the recovery of the travel industry at large.
According to GuruFocus, Hertz has three severe warning signs of extremely low interest coverage, increased long-term debt and declining revenue per share. Some of the most glaring issues facing the stock are a cash-to-debt ratio of 0.05, which is lower than 89.58% of its competitors, alongside an equity-to-asset ratio of 0.07, which is lower than 94.47% of other companies in the industry.
With an Altman Z-Score of 0.54, the rental car company finds itself falling well into the realm of distress, which implies that bankruptcy could be a definite possibility in the next two years. Should Hertz and other rental companies stay in business, they will likely do so with decreased numbers of fleet vehicles as well as new vehicles purchased over the next year.
Other top guru shareholders include Dimensional Fund Advisors LP (Trades, Porfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Par Capital Management Inc. (Trades, Portfolio), Vanguard Group Inc. (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio)'s GAMCO Investors.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation.
Read more here:
- 1,000 Entrepreneurs: The Natural Home Goods Revolution With Stuart Landesberg​
- 1,000 Entrepreneurs: Nicole Sahin on Easy Employment for Global Companies
- 1,000 Entrepreneurs: Deeanne Akerson on Building a Business and Innovating for Moms
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
Also check out:
