The imminent bankruptcy of Hertz is about to go down in the financial history books for all the wrong reasons.
The management team, along with their genius investment banker friends are about to pull off the most brazen legal transfer of wealth ever before seen in the stock market.
Using legal language as cover, Hertz is asking investors to directly pay off bondholders, saving these bondholders from taking losses as the company goes through bankruptcy.
If there has ever been a time to avoid a stock, this has to be it.
How the Bankruptcy Process Works
When a company is operating normally and has cash, the assets are worth more than the debt the company borrowed, leaving some value for owners of the stock.
Bankruptcy happens when a company is unable or unwilling to pay either the interest on a loan or pay back a portion of the loan when its due.
The owners of these loans (bondholders) can legally force the company into bankruptcy, sell off the business whole or in pieces and take whatever cash they get.
Sometimes the cash is enough to cover their loan in full and the stockholders don’t get wiped out, but most of the time the stock goes to 0.
The Hertz bankruptcy is a worst case scenario for stockholders as we estimate the company’s assets in bankruptcy are worth $2 billion less than the value of the debt.
Hertz Stock is $2 Billion in the Hole (-$15/sh)
| Book Value | Recovery % | Liquidation Value | |
| Cash | 1,409 | 100% | 1,409 |
| Net Current Assets | -18 | 100% | -18 |
| Vehicle Value | 14,309 | 90% | 12,878 |
| PP&E | 765 | 75% | 574 |
| Intangibles | 3,231 | 50% | 1,616 |
| Goodwill | 1,080 | 0% | 0 |
| Operating Lease ROU Assets | 1,832 | 10% | 183 |
| Total Assets | 22,608 | 16,642 | |
| (-) Debt | 18,754 | 18,754 | |
| Stock Value | 3,854 | -2,112 | |
| Value/Share | $27 | ($15) |
Hertz is Worthless Even with a Successful Stock Offering
Let us be clear, if you buy Hertz stock now or participate in the new $500 million stock offering, you are going to lose everything.
The current stock raise of only $500 million is way too little to make a difference.
Source: Grizzle Estimates, SEC.GOV
Investors seem to be completely unaware that the car rental business was also broken well before COVID-19 came along.
Hertz has been losing money for years and in 2019 alone, spent $1.5 billion more cash than it took in from renting out cars.
Even if the company raises enough cash to stay in business for now it will only delay the inevitable.
Continued losses in 2020 will force the company into bankruptcy sooner or later and you will lose every dollar you put into this stock.
Cash Flow is Deep in the Red
Source: Grizzle Estimates, SEC.GOV
In the offering document that accompanied the $500 million raise, Hertz bankers explicitly warn investors they are unlikely to get a cent back if Hertz goes ahead with the bankruptcy (which they are).
These warnings will be read by almost no one, but they give the company legal cover to take your money anyway.
Sec.Gov
Its a travesty regulators aren’t willing to step in and save investors from the stock market equivalent of a mugging.
Just because a transaction is “legal” doesn’t mean its right or isn’t a guaranteed loss for investors.
When Grizzle called out the downside to come in the Cannabis market, we thought it was a clear-cut no-brainer of a stock call, but somehow Hertz has made our lives even easier.
Hertz filed for bankruptcy, and go bankrupt it will.
The only question in this outcome is if investors will throw away everything bailing out bondholders who took a gamble and lost or will they wake up and avoid watching the money they worked so hard to earn go up in smoke?
About Author
The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.