TencentSecurities on October 20, car rental companies that have filed for bankruptcy protectionHertz car rentalShares rose nearly 20 per cent again in early trading on Monday (but closed down 13 per cent by the close), which is likely to be fuelled by Friday's $1.65 billion financing of debtors' asset holdings.
Hertz's car rental business has shrunk sharply because of a sharp drop in travel demand as a result of social isolation, and the company filed for bankruptcy protection on May 22, a move that usually hurts ordinary shareholders. Even Carl Icahn, a prominent billionaire hedge fund manager, panicked and sold more than 55 million shares in the company.
Although current Hertz shares may end up worthless to common shareholders, there is still a strange disconnect between the company's share price and the reality of Hertz as a bankrupt company. The stock more than doubled when the company announced that it had (subject to bankruptcy court approval) $1.65 billion of debtors holding assets. This will enable Hertz to raise cash to continue operations during bankruptcy negotiations with lenders.
Hertz will have a variety of options, but it must first meet the requirements of the main creditors who finance its $19 billion debt before it can provide residual value to common shareholders. The new financing will help the company operate in the restructuring process, but at the negotiating table, it will still put the main creditors ahead of the common shareholders, which makes it very unlikely that the ordinary shareholders will get the surplus value.
The financing does show that creditors see the future of the car rental business. Indeed, transportation and car rental demand have shown signs of recovery since the coronavirus epidemic swept the United States. Hertz is successfully implementing its car sales strategy, which has reduced its fleet of 532000 vehicles to the 310000 expected in December 2020, a move that will help repay some of the debt and streamline the company's structure after bankruptcy.
However, some factors have not yet been determined, and the company is now spending a lot of time negotiating with creditors. Hertz's shares may still end up worthless to common shareholders. The company may have a future, but it may be restructured in the form of new shares. This is also a way for creditors to recover value from the financing provided to Hertz.
So why did Hertz soar another 19% on Monday? The answer may be that some novice investors are confused about the bankruptcy process, or that many investors simply see Hertz's shares as a casino. Either way, long-term investors will wisely observe the volatility of these stock prices and be cautious about them. (Drizzt)