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Hertz’s Equity Is Worthless

With Hertz shares suspended in Wednesday trading, the market’s suspension of disbelief was also briefly suspended.  As I noted in my Forbes column Monday, Hertz shares are essentially worthless and investors should avoid them. In brief hindsight, Hertz Global Holdings was an Enron-esque platform that used a web of special purpose entities (SPEs) to generate false growth by continually purchasing new cars ($4.4 billion worth in the first quarter of 2020 alone) and then attempting to rent those vehicles as many times as possible while they rapidly depreciated.  

What put a halt to this Charles Ponzi-like operation was not the SEC, but Covid-19 and its associated travel lockdowns.  So, bizarrely, Wednesday saw the Chairman of the SEC, Jay Clayton going on the second-most watched financial news network and proclaiming that his agency had issues with Hertz’s recent filing for up to $500 million in new equity via an at-the-market offering from Jefferies.  Issues?  Like the fact that Hertz filed for bankruptcy on May 22nd?  Like the fact that Hertz’s first quarter 10-Q disclosed that Hertz doesn’t even own the cars that it rents, rather they are owned by the SPEs?  

From the 10-Q:

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. These assets are not available to satisfy the claims of our general creditors.

That same filing notes that on April 27th, Hertz skipped an interest payment due to its SPEs, which triggered an amortization event on May 5th.  Hertz entered into a forbearance agreement with some of its creditors shortly thereafter, but those were effectively rendered useless with Hertz Global’s bankruptcy filing on May 22nd.  

So, the wheel stopped spinning.  Permanently.  

As per Hertz’s 10-Q;

As a result of the amortization event, and notwithstanding the forbearance agreement described below, proceeds of the sales of vehicles  that collateralize the notes issued by HVF II must be applied to the payment of principal and interest under those notes and will not be available to finance new vehicle acquisitions for Hertz.

Without the ability to buy new cars, the equity in Hertz became useless on May 5th. Note that that was six days before Hertz’s first quarter earnings call.  The slides from that call make no mention of the occurrence of the amortization event.  So Hertz management knew that their balance sheet had been substantially encumbered, but put a brave face on things for shareholders, anyway. On May 5th, HTZ shares closed at $3.01, implying an equity value of $428 million based on the 142.2 million shares outstanding as of May 4th.  

But that $428 million was a mirage.  As soon as Hertz’s assets became encumbered, the company’s equity essentially became worthless.  As of March 31st, Hertz carried on its balance sheet $14.3 billion of vehicle value and $14.4 billion of vehicle-related debt.  Those vehicles have become much less valuable as used car prices plunge and that plunge is exacerbated by the market’s knowledge of Hertz as a motivated seller of vehicles. 

Hertz’s most recent post-bankruptcy update—filed this Monday with the SEC—notes a plan for the distribution of $1.283 billion of cash in the thirteen-week period following the initial May 22nd Chapter 11 filing.  That would completely burn through the $1.017 billion of unrestricted cash on Hertz’s balance sheet as of March 31st and most to the $392 million of restricted cash as of that date, as well.  None of that cash is earmarked for equity holders.  

So, why would the SEC allow Hertz to sell stock via Jefferies?  Well, according to Chairman Clayton, his agency has “comments” on Hertz’s filing.  I believe this is the reason for the suspension in trading in Hertz shares Wednesday.  Really, though, the best description of Hertz from a regulatory standpoint came in a separate CNBC interview with one of Mr. Clayton’s predecessors, Harvey Pitt. 

(M)ost securities experts had always thought you could offer garbage for sale to the public as long as you said ‘we are offering you garbage, and you really shouldn’t buy this but you have a chance to buy it,’” Pitt said. “No one ever really anticipated that people would be gullible enough to do that.”

That quote encapsulates the markets in 2020 better than any I have read.  It’s Thunderdome out there.  If you think the SEC is going to protect you, the individual investor, you are sorely mistaken.  Please don’t make the expensive mistake of thinking there aren no more Hertzes out there.  There are, and I will keep writing about them.

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