“This Is Just Unbelievable!”: Bankrupt Hertz Is Ripping Shareholders In a Pandemic Economy

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 audacity 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, as well, 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 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.

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