Hertz Global Holdings Inc., a major player in the car rental industry, had a solid fourth quarter last year. The company’s executives were expecting a promising first quarter of 2020 until there was an outbreak of COVID-19 pandemic. Five months down 2020, Hertz is on the brink of bankruptcy. The company has more than $20 billion of debt and a huge fleet of vehicles that are depreciating as the day passes by. On top of that COVID-19 and stay-at-home orders have grounded much of its fleet leading to no cash inflow for the company. Not to mention the economy is also at standstill.
Hertz has filed for bankruptcy, Chapter 11 in order to remain operational until the company can service its debt. Chapter 11 filing doesn’t include the international operations of the company. In a general bankruptcy case of a company, the company tries for a settlement with the investors and lenders or bondholders negotiating to let the company operate normally. Hertz had until May 22 to work out an agreement with its lender and bondholders. However, it is being reported that the company is seeking an extension of 60 days to negotiate the terms. Hertz also hinted at raising debt to remain solvent if the situation seems to be going out of hand. Although, to operate normally, Hertz may have to sell some of its assets. This may jeopardize business lines as well as franchise owners.
It only makes sense to sell some of its assets and mainly its vehicles. Liquidating its vehicles will be prioritized if senior lenders force the company as the vehicles will lose its value day by day. Hertz will sell the vehicles as soon as the used car market gains some strength. But massive vehicles in the market could depress the prices. Hence, some analysts believe that Hertz will face liquidation threat. Analyst predict that if Hertz has to liquidate and pay its creditors, the company could fetch just a little more than $2 billion. Selling other assets like real estate, vehicles, etc. could fetch the company around $800 million – for a total of $2.5 billion, or just above 60 cents on a dollar for senior investors.
What led to Bankruptcy
Hertz is one of the top players in the U.S. car rental services. However, travel restrictions, shutdowns, and lockdowns have brought years of management missteps as a crisis to the company. The company is found consistent in changing its leadership. This month, Paul Stone, is appointed as the head of North American car-rental operations. He is the fifth CEO of the company since 2014.
The primary reason why Hertz is affected more than any other company is the company’s fundamental strategy. Hertz has a strategy of leasing or owning a large portion of its vehicle fleet. The fleet ownership structure has been festering Hertz for years. The company avoided acquiring them through buyback agreements with the manufacturers. To put a number on the ownership, the company owns around 89% of the vehicles in its fleet. Compared that to its rivals such as Avis Budget Group Inc., the ownership of vehicles ranges from around 60% to 65%.
Hertz typically sells from its fleet into the used car market when there is less demand. Such companies slow their new car purchases. But due to the pandemic the prices of used cars tumbled. Hertz took much worse than any of its competitors. Hertz had an outsize focus on gaining market share and had trouble with the advent of ride-hailing.
In 2012, under the leadership of then CEO Mark Frissora, Hertz made a $2.5 billion acquisition of Dollar Thrifty. According to many analysts, the company paid too much for Dollar Thrifty. Adding to this, the company failed to reap the benefits of the acquired company. Hertz couldn’t integrate Dollar Thrifty, which if done at that time, could have given Hertz a pricing power. Around the same time, the company gained a market price at the cost of the service price. Although the market share was high but the margin on per service delivered was less. The company focused on gaining market share rather than developing and investing to update its technology. Also, its fleet remained unchanged.
Hertz already had a huge amount of debt at that time stayed until this day. As of March 31, Hertz debt was reported as $20.6 billion with a market valuation of $425 million. In the first quarter of the fiscal year 2020-21, Hertz had $1 billion in cash and cash equivalents. In the current week, Hertz shares are traded at a record low. The share price has plunged more than 80% in a year. Compared to Hertz, Avis is doing much better, its market price has dipped about 50% in a year.
In a Nutshell
Hertz may continue to operate for some time but it is unlikely the once-dominant rental car provider will emerge strong out of this. The macroeconomic factors are already difficult and the coming months will prove to be much more difficult for all industries. Investors should understand that the tides are against Hertz and are strong.