Hertz Global Holdings Inc., whose stock appears destined to be wiped out when its bankruptcy case is finished, wants to sell US$1 billion more of its shares, even though it readily concedes those might wind up worthless, too. Investors promptly bid up Hertz by 68 per cent.
The car renter wants to take advantage of the quixotic rally in its stock by offering as many as 246.78 million common shares, according to a court filing. The proceeds would provide some much-needed working capital while Hertz tries to dig out from massive debts that forced it into court protection. Judge Mary Walrath set a hearing for later today to consider the idea.
“This is what I love about bankruptcy — there’s never a dull moment,” said Melanie Cyganowski, a former bankruptcy judge now with the law firm Otterbourg, who said she hasn’t seen a financing like this.
Hertz gained 41 per cent to US$2.90 at 10:47 a.m. in New York and rose as high as US$3.47. Investors are bidding up Hertz and other bankrupt companies on optimism that the economy and specifically air travel is poised to rebound. Hertz might also benefit from prices of used cars at auctions coming all the way back from a mid-April collapse.
Hertz bankruptcy attorney Tom Lauria did not return an email seeking comment.
Hertz based its request to the court on a nearly tenfold increase in its stock from 56 USc ents on May 26 to US$5.53 on Monday. While the stock has slid since then, Hertz said in the filing that a sale of shares still could help cover its debts.
“The recent market prices of and the trading volumes in Hertz’s common stock potentially present a unique opportunity for the debtors to raise capital on terms that are far superior to any debtor-in-possession financing,” the company said, referring to a traditional bankruptcy loan.
Hertz said it would warn any potential buyers that “the common stock could ultimately be worthless” and protect Jefferies LLC, the firm managing the potential sale, against lawsuits that could result from the offering.
“As odd as it is, it might turn out to be brilliant move,” said Bruce Grohsgal, a retired bankruptcy lawyer who teaches at Widener University’s law school in Delaware.
In the bankruptcy process, sometimes debt that seemed hopelessly out of the money can be repaid in full if business improves. If there’s money left over, shareholders can get a recovery, too, Grohsgal said. That’s possible in this case because of the unprecedented pandemic and potentially positive outcome when the pandemic eases, he said.
Still, the new stock could be risky because in bankruptcy all debt — including Hertz’ bonds trading Friday at less than half their face value — would have to be repaid in full before shareholders get a single cent.
“A lot of people would ask, what the heck is going on?” Grohsgal said.
Lawyers for Hertz requested an emergency ruling “given the volatile state of trading in Hertz’s stock.” Hertz insiders sold shares during the recent rally, according to data compiled by Bloomberg.
Hertz disclosed earlier this week that New York Stock Exchange staff is starting proceedings to delist its stock. The company has appealed.
While selling shares will let Hertz avoid the fees and interest payments of typical bankruptcy loans, that has to be weighed against the risk of a lawsuit, according to Cyganowski, the former bankruptcy judge.
“It is incredibly creative and they get props for that, but I wouldn’t buy those shares,” said Nancy Rapoport, a professor at UNLV’s William S. Boyd School of Law, who said she has never seen a bankruptcy funded this way. “I guess they’re trying to catch whatever the opposite of a falling knife is.”
The case is The Hertz Corporation, 20-11218, U.S. Bankruptcy Court for the District of Delaware.