Hertz Deal Cancelled

Interesting times when the US Securities Exchange Commission feels compelled to stop Hertz, in bankruptcy, selling new shares to the market. Given the capital structure of the company, any shares issued during the bankruptcy process would most likely go to pay off the senior debt holders and effectively be worthless after the bankruptcy process was completed. The fact that Hertz stated this risk very explicitly in its disclosures and that this did not deter retail investors is a concern. A more bizarre omission by Hertz is the lack of mention that “substantially all” of the revenue earning assets of the company are secured and unavailable to the company in the bankruptcy process!

Hertz, currently in the early stages of a Chapter 11 bankruptcy process, received approval from the bankruptcy court to sell up to $1bn of new shares, however, the company said it was planning to sell $500m.

Retail investors have been very active in trading the shares since the company entered bankruptcy protection. Trading was halted following comments by Jay Clayton in an interview on CNBC, the agency’s chairman, He said “we have let the company know that we have comments on their disclosure,” and added, “In most cases, when you let a company know that the S.E.C. has comments on their disclosure, they do not go forward until those comments are resolved.” He further added that “there are professionals involved and we at the SEC, we’re trying to carry out our responsibilities in situations like this as best we can and I expect the other professionals around this situation to carry out their responsibilities as best they can.”

Valuation of Hertz – Capital Structure

The main tangible asset investors think about when looking at Hertz is the value of its car rental fleet. However, Hertz used the asset-backed securities (ABS) market to fund its business and these bonds are secured on the rental fleet! Therefore, those secured or encumbered assets are not available to support the claims of the unsecured claimants.

The senior unsecured debt was trading at $38 per $100 of principal, a significant discount and a clear indication that the market expected the senior debt holders to take a very heavy loss.

The senior unsecured debt was trading at $38 per $100 of principal, a significant discount and a clear indication that the market expected the senior debt holders to take a very heavy loss.

Hertz Disclosures

In its prospectus supplement, Hertz was very clear in outlining the risk of investing in the new shares and stated very clearly the risks involved. In fact, it used the word “worthless” a total of seven times in its regulatory filing.

We are in the process of a reorganization under chapter 11 of title 11, or Chapter 11, of the United States Code, or Bankruptcy Code, which has caused and may continue to cause our common stock to decrease in value, or may render our common stock worthless.”

Hertz – Prospectus Supplement – June 2020

It further added

“Although we cannot predict how our common stock will be treated under a plan, we expect that common stock holders would not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured and unsecured indebtedness (which is currently trading at a significant discount), are paid in full, which would require a significant and rapid and currently unanticipated improvement in business conditions to pre-COVID-19 or close to pre-COVID-19 levels.”

Hertz – Prospectus Supplement – June 2020

It was even more explicit:

We also expect our stockholders’ equity to decrease as we use cash on hand to support our operations in bankruptcy. Consequently, there is a significant risk that the holders of our common stock, including purchasers in this offering, will receive no recovery under the Chapter 11 Cases and that our common stock will be worthless.

Hertz – Prospectus Supplement – June 2020

Missing Disclosure

There is no denying that the risks are clearly laid out in plain English in the prospectus. However, there is no mention of the encumbered assets in the prospectus supplement! However, in the latest annual Form 10-K, issued in February 2020, there are several mentions of the level of secured assets.

There is no denying that the risks are clearly laid out in plain English in the prospectus. However, there is no mention of the encumbered assets in the prospectus supplement! However, in the latest annual Form 10-K, issued in February 2020, there are several mentions of the level of secured assets.

Substantially all of our revenue earning vehicles and certain related assets are owned by special purpose entities, or are encumbered in favor of our lenders under our various credit facilities, other secured financings and asset-backed securities programs. None of such assets are available to satisfy the claims of our general creditors.

Hertz Form 10-K for year ended December 2019

It is surprising that a key risk, such as “substantially all” of the revenue earning assets being secured and unavailable to the company in the bankruptcy process is not actually included in the documentation specifically relevant to the specific stock offering!

As a result, the lenders under those facilities would have a prior claim on such assets in the event of our bankruptcy, insolvency, liquidation or reorganization, and we may not have sufficient funds to pay in full, or at all, all of our creditors or make any amount available to holders of our equity. The same is true with respect to structurally senior obligations: in general, all liabilities and other obligations of a subsidiary must be satisfied before the assets of such subsidiary can be made available to the creditors (or equity holders) of the parent entity.

Hertz Form 10-K for year ended December 2019