It Will Only Get Worse For Hertz, But Will it Get Better After That?

Hertz Global Holding (NYSE:HTZ) will soon be announcing the terms of its Chapter 11 filing. The news is sure to displease investors. But honestly, that’s not Hertz’s primary concern. After all, what did investors really expect? The company is working its way through $19 billion of debt. And there’s no guarantee that Hertz’s bankruptcy terms will allow the company to completely satisfy its creditors.

And that makes it really hard to get behind Hertz stock. The stock will go to zero. The company acknowledged this in its June 15, 2020 bankruptcy filing. The company said, “Consequently, there is a significant risk that the holders of our common stock will receive no recovery under Chapter 11 Cases and that our common stock will be worthless."  

The only question is what will happen to Hertz once the company emerges.

The Effects of the Pandemic Will Linger For Years

There were two effects to the lockdown. One of these was short-term. In the immediate aftermath of the shelter-in-place orders, there was simply no place for consumers to go. And this was reflected in the company’s revenue that was down 9% in the last quarter at $1.9 billion.

But that was expected. Any company associated with travel and tourism is being clobbered by the novel coronavirus. Rental car companies rely on airline traffic and we simply aren’t flying. And while several airlines, most notably Southwest Airlines (NYSE:LUV), are professing that it is safe to fly; there is no guarantee that people will feel safe.

This brings me to another problem facing Hertz. The novel coronavirus has created a situation where it’s unknown how much demand will return. Rental cars were already facing pressure from ride-hailing services such as Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT). This was affecting both business and recreational travelers. And while those companies are now having problems of their own that stem from the pandemic, it doesn’t mean that consumers will come back to rental cars.

I can’t stress this enough. The economic recovery is not dependent on how many customers are willing to wear masks and practice social distancing. It’s about each American making an individual risk assessment. Personally, I rented a car about two weeks when my car was in the shop. To be totally honest, I didn’t give the virus a second thought.

But I know that I’m in the minority on that. I would probably also take a flight and, if I enjoyed them more, go on a cruise.

But I’m also not (yet) in the primary risk age group. Would I feel differently if I was? Maybe and that’s the problem that Hertz faces. Many consumers may simply decide that they are safer just driving their own car. And many businesses may simply decide that certain business trips are no longer essential to their business.

Chapter 11 May Not Be Enough

One of the dire consequences facing Hertz shareholders at the moment is that the Chapter 11 process may not be enough to allow the company to resolve its debts. If that’s the case the company would have to shift to a much more onerous Chapter 7 bankruptcy which will result in a liquidation of assets.

In an attempt to help the company with the liquidity issue it’s facing, the company received bankruptcy court permission to sell up to $1 billion of stock. On Monday, June 15, 2020 Hertz announced that they had authorized Jefferies to sell up to $500 million of shares in “at the market” offerings. This means that sales would be sold in incremental units over time at the prevailing market price.

Barron’s presents the lose-lose possibility that investors face:

“If the share price declines sharply from here, the company won’t want to sell the full amount of stock. And if that happens, it may not have enough cash to finance its operations through bankruptcy, which could force it to rely on new costly debt financing, and the holders of that new debt would have greater claim on company assets than current shareholders do.

If Hertz’s share price holds up or even increases from here, the company will likely want to sell more stock through its agreement with Jefferies. And if it sells the full amount of stock allowed under today’s filing, that would significantly dilute the value of existing shareholders’ current ownership stakes.”

There is a very real possibility that investors could be buying shares that will soon be worthless. For that reason I expect many investors to take a hard pass on funding Hertz through bankruptcy.