“This
Is Just F--king Unbelievable!”: Bankrupt Hertz Is a Pandemic Zombie
In a company in the midst of
coronavirus-caused bankruptcy, where stockholders are likely to be wiped out,
there are weird signs of life—worthless stock ticking up, an equity offering.
But betting on an undead company is a very bad idea.
JUNE 15, 2020
The pandemic and its economic consequences have occasioned any
number of counterintuitive events in the financial markets. There has been
Herbalife’s $600 million junk bond deal that the company used to buy back some
of the stock of the company’s largest shareholder, the multibillionaire Carl
Icahn. There have been the other billionaires who have raised hundreds
of millions of dollars of new equity from investors through SPACs—special
purpose acquisition companies—on the whiff of a hope that the money will be
invested wisely. There has been Boeing’s much-needed and successful $25 billion
capital raise and its decision to fire 10% of its workforce.
Then, in a class of
absurdity by itself, is what’s happening at Hertz, the nation’s second-largest
car-rental agency. On May 22, Hertz filed for bankruptcy protection, after the
combination of nearly $19 billion of debt and some 700,000 idle rental cars in
the midst of a global pandemic left its business in financial tatters. It is
one of the largest bankruptcies to result from the pandemic. On May 26, Carl
Icahn, Hertz’s largest shareholder—with a nearly 39% stake in the company—sold
his 55.3 million shares for an average price of 72 cents a share, generating
some $40 million of proceeds and perfecting a loss for him of around $1.8
billion on his Hertz investment. At the time of his stock sale, Icahn said he
had faith in Hertz but that the COVID-19 pandemic had resulted in an “extremely
rapid and substantial decrease in travel” that caused Hertz “major financial
difficulties.” Nothing unusual yet: a company weighed down by way too much debt
and an exogenous event that ruptures its business files for bankruptcy,
followed by its billionaire largest shareholder getting what he can for his
soon-to-be-worthless stock.
The weirdness then
started in earnest. Between May 26 and June 8, Hertz’s stock—still trading on
the New York Stock Exchange during bankruptcy although destined for
delisting—exploded in price. During those two weeks the Hertz stock increased
to $5.53 per share, from 56 cents per share, a ridiculous and inexplicable rise
of nearly 10 times. Sometimes these kinds of crazy things happen to the publicly
traded stock of bankrupt companies, where woefully uninformed retail
investors—you and me—buy up the stock hoping other fools will too. And
sometimes, as in this case, the speculators can make money. The stocks of other
newly or near-bankrupt companies—J.C. Penney, Chesapeake Energy—have also
rallied in recent weeks. It is all pure gambling. There is no
circumstance—zero—where Hertz shareholders will ever get a recovery once a plan
of reorganization with creditors is agreed upon, probably months from now.
How do I know? Part of
the reason is because I understand corporate restructuring. For nearly five
years at Lazard, in the early 1990s, I worked on several of the biggest
bankruptcies of the day, among them Revco Drug Stores and Federated Department
Stores. What happens 99.9% of the time is that existing shareholders get wiped
out and the creditors, most of which won’t get their money back, divide up
what’s left of the carcass. It’s often a Darwinian battle of epic proportions,
with creditors fighting over every scrap of value. What happens time and time
again is that unless and until every creditor gets back every penny it is owed
plus accrued interest, there will be no recovery for the shareholders. As in
zero.
That’s what is going to
happen to Hertz, too, and I know that because the Hertz bonds are trading at a
severe discount. As of June 10, according to the Wall Street Journal, Hertz’s
nearly $3 billion of unsecured bonds were trading at around 40 cents on the
dollar. That means—at the moment, anyway —smart investors do not believe
Hertz’s creditors will get their money back. (If they did, the bonds would be
trading at 100 cents on the dollar, as they were in February before the
lockdowns destroyed Hertz’s business.) If creditors don’t get their money back,
there is no way shareholders are going to get any of the remaining crumbs when
the restructuring gets agreed upon. It’s just not going to happen. If it were
going to happen, there is no way Icahn would have sold his stake in Hertz for
an average of 72 cents a share.
And now things at Hertz have gone from the sublime to the
ridiculous. It’s one thing for speculators to speculate before the existing
Hertz shares get delisted, which the New York Stock Exchange has ordered. (In a
June 10 public filing, Hertz said it was appealing the NYSE notice and then
admitted, “There can be no assurance that the NYSE will grant the Company’s
request for continued listing at the hearing and—my italics—whether there
will be equity value in the Company’s common stock.”) It’s quite another
for the debtor—Hertz—to take advantage of its own badly misinformed
shareholders by attempting to sell them new equity, knowing for sure that
stockholders will get wiped out after a plan of reorganization is agreed to,
leaving them with nary a sou. It’s easily one of the more cynical financial
ploys to come along in a season filled with cynical financial ploys. (And Hertz
even admits in its prospectus that the investors in the offering could get
wiped out in the bankruptcy.)
But that is exactly what
Hertz is attempting to do, with the help of Jefferies, the midsize investment
bank that has agreed to underwrite the stock sale. Hertz’s decision lit up
Twitter. “This [Hertz] shit gonna go down in the record books,” Roberto
Pedone tweeted. “A company in bankruptcy just found idiots to buy
their stock before it probably goes to ZERO. Unless some miracle gets pulled
off, they just sold you a valueless piece of paper.” Added Nick
Verbitsky, in a tweet on June 12, “Hertz stock up 27% today after a ch
11 filing and a massive share offering announced. When the dumb money gets
murdered on this, there can be no sympathy.”
Of course, since Hertz is
in bankruptcy, its attempt to raise $1 billion had to be approved by Mary
Walrath, the federal judge in Delaware overseeing the Hertz bankruptcy
case. In its “emergency motion,” filed June 11, Hertz conceded its stock price
had been fluctuating wildly since it filed for Chapter 11 and then argued that
Walrath should allow Hertz “to capture the potential value of unissued Hertz
shares for the benefit” of the Hertz “estate,” bankruptcy lingo for the
unfortunate creditors carving up the shrinking pie. In other words Hertz argued
that it had a unique chance to take advantage of the idiots speculating in its
worthless stock and the judge should let it to do it.
But surely Walrath would
put a stop to Hertz’s cynical financial move, right? Surely she would want to
protect the unsuspecting Hertz shareholders who, for whatever reason, had not
yet figured out that when all is said and done, they are going to get wiped out
when the plan of reorganization that she must approve gets adopted. Walrath, a
graduate of Princeton and Villanova Law, has been a bankruptcy judge in
Delaware since September 1998. She served as chief judge for five years in the
mid-2000s. Her term expires in 2026. She should know, shouldn’t she, how absurd
Hertz’s request is? She would surely deny the debtor’s motion. (For what it’s
worth the Securities and Exchange Commission could probably put a stop to the
stock sale too.)
But Walrath didn’t do the
right thing. Late Friday afternoon she approved Hertz’s request to try to raise
$1 billion of fresh equity in the stock market off the backs of apparently
clueless speculators. I was talking to a friend of mine over the weekend, a
Harvard Law School graduate and a longtime investor in distressed companies.
Nearly immediately the conversation turned to Walrath’s decision. He said he
knew her and respected her as a jurist. But then he said, without the slightest
prompting, “But this is just fucking unbelievable!”
Couldn’t have said it
better myself. Buyers beware. Be very, very beware.