Rainmaker

It Hertz so bad

Hertz shares plummet more than 50% after Dow Jones reports that the company is is preparing a bankruptcy filing for as soon as tonight (CNBC)

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You just got back from Vegas with a bad credit score and possibly other unspeakable things. How do you get home? If you answered “Uber”. It’s one reason these companies are being hammered. 2/3rds of car rental revenues come from airports. Hertz (the care rental company) is also $19bn in debt, which really doesn’t help. 

US companies usually buy the cars & them sell them once they’re done. In Europe, they buy the cars BUT with the right to sell them back to the manufacturer at a locked-in price in the future. Which one seems like the less risky option?  Exactly – the European model

Now Hertz needs to sell its cars to pay off its debt. How many cars? Around half a million cars. If they dump all 500k into the market at once, car prices will tank. So they will try and sell around 30k cars a month.

Hertz also owns Dollar & Thrifty car rental. They bought the business in 2012 for $2.3bn (terrible deal)

Hertz refused to increase their offer for Thrifty stock in 2008 ($2/ share) and ended up paying $72 four years later. Most people believe they could have scored it at $54

Besides completely overpaying for Dollar & Thrifty. Hertz also had a series of accounting issues. They paid SEC fines and had to restate 3 years of financial info. The company turned around and sued 4 of its senior exec for $200m in damages.

Carl Icahn, who is valued at just under $17bn, owns roughly 40% of Hertz. Wait? Why doesn’t he save the business? Billionaires aren’t fond of burning their own cash to save dying businesses. Richard Branson recently pleaded for external help to save Virgin.

“In chaos, lies opportunity”

Enter Apollo Global, a private equity firm known for betting on bankruptcies. They started buying up insurance contracts (credit default swaps) on Hertz debt a few months ago.  As bankruptcy risk increases, the value of the insurance goes up. Even in the most dire financial situations, hedge funds will look for opportunities to make cash. 

Should government always intervene distressed companies? Short answer – No. Usually debt holders and creditors get paid out first. Employees get settled (with protected benefits). Bailouts are used to “rescue” already wealthy investors, hedge funds and large shareholders.

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