Hertz Moves Forward With First Ever Initial Bankruptcy Offering

The bankrupt rental car company is planning a novel experiment in corporate finance

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Jun 15, 2020
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Hertz Global Holdings Inc. (HTZ, Financial) may have filed for bankruptcy, but it has not stopped fighting. On June 11, the beleaguered rental car company did the seemingly unthinkable: it petitioned the judge overseeing its bankruptcy proceedings to allow it to raise cash by selling off “246,775,008 shares of common stock through at-the-market transactions under Hertz’s existing shelf registration.” On June 12, Judge Mary Walrath gave Hertz the greenlight to raise up to $1 billion through equity sales.

Mere minutes after news of Judge Walrath’s approval hit the newswire, Zero Hedge officially declared it the “World’s First Initial Bankruptcy Offering.” Such an "IBO" (if I may be so bold as to coin the term) is without precedent. If it succeeds as more than just a Ponzi scheme, it will carry financial markets into wholly uncharted waters. There may be dangers lurking on those stranger tides.

Strange new world

The sheer audacity of a company in the midst of bankruptcy proceedings attempting a stock offering left even the most seasoned financial analysts and market commentators stunned. Charley Grant, the Wall Street Journal’s always-insightful stock market reporter, expressed this widely felt sentiment succinctly in a June 11 tweet: “My head hurts. A lot.”

Most observers appear to have been flabbergasted at the financial irrationality of the idea of selling securities doomed to imminent worthlessness. Many were dismayed or amused (and sometimes both) by the behavior of the many retail investors who were effectively responsible for making this latest financial Rubicon possible.

On June 11, Zach Weinberg, co-founder and COO of Flatiron Health, offered this fitting summation of the prevailing sentiment among investors toward Hertz’s plan:

“I have never read anything more insane in the finance world. Hertz asking if they can sell equity to raise cash to pay debtors because equity market is so dumb that they'll buy it anyway.”

Action approved

"It is not clear where the fulcrum security is and what enterprise value of Hertz will be," Walrath said. "Selling stock is an inexpensive way to help finance the bankruptcy case."

"A committee of unsecured creditors backs the share sale because it still could bring in about $500 million, without having to pay the high interest rates and fees associated with traditional bankruptcy loans," creditor attorney Thomas Moers Mayer said.

With the company and its principal creditors in general agreement regarding the benefits of a stock offering over traditional debtor-in-possession, or DIP, financing, the judge evidently felt compelled to give the go-ahead to history’s first ever IBO.

Not quite a done deal

Despite receiving court approval, Hertz’s path to selling stock is not yet fully cleared. As Zero Hedge pointed out on June 12, the Securities and Exchange Commission may yet put the kibosh on Hertz’s IBO plans. However, the prospect of such an intervention seems doubtful in light of the SEC’s more hands-off approach under the Trump administration.

Even if the SEC wanted to block, there does not appear to be any tangible impediment, legal or regulatory, to a company carrying out an IBO, at least from what I know. As corporate lawyer-turned-investment manager Montana Skeptic pointed out in the wake of the approval:

“If the marks are going to surrender their money so insistently, then why not at least have it go to creditors. The job of the BR judge is to encourage lawful measures that enhance the BR estate's value, and creditors deserve more solicitude in BR than equity holders.”

While hardly a charitable description of the investors who might be interested in Hertz’s IBO, it captures a key point: there is little to distinguish the proposed sale of worthless new equity to investors from the ongoing buying and selling of the existing worthless equity.

My verdict

When all is said and done, very little has actually changed for Hertz as a result of its courtroom victory. Selling out its full shelf, even at its currently elevated share price, would at best net Hertz about $700 million. That is much less than would be needed to stave off a total equity wipeout, as TeslaCharts, a noted observer of corporate financial chicanery, pointed out on June 12:

“Once those shares are sold, that's it. There's not going to be any other 'new' equity. If we take today's premarket price of ~$3 a share, there's now $750 million of potential value for the bond holders. Does this make the debt holders whole? No. But it certainly helps.”

The equity may bounce around for a while longer, but the bankruptcy process seems certain to result in it going to zero. Ultimately, the world’s first initial bankruptcy offering will do little more than put more money in the pockets of Hertz’s creditors. Equity investors will still get zeroed out in the end. My recommendation is to steer well clear of this one.

Disclosure: No positions.

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