Hertz shareholders in line for $8 recovery under bankruptcy plan
Hertz was the original meme stock we couldn’t make sense of. A Robinhood-fueled stock frenzy after the car rental giant's May 2020 bankruptcy filing spawned finger-wagging and ridicule — but it turns out the day traders were right.
What's new: Hertz's latest bankruptcy plan, in which Knighthead Capital Management and Certares Management will buy the company for $7.4 billion, calls for equity holders to receive about $8 per share, Bloomberg reported Wednesday.
Why it matters: Usually shareholders of bankrupt companies lose their entire investment, while the distressed debt investors make money by taking over the company. That isn't happening this time.
Our thought bubble: The unusual payout stems from a string of rare events that make it unlikely to be repeated very often, if at all.
- Those circumstances include a once-in-a-generation (hopefully) pandemic, unprecedented government intervention in market liquidity, and supply chain issues that have more recently made rental car rates skyrocket.
Backstory: Hertz filed for Chapter 11 after car rental volumes evaporated at the onset of the pandemic.
- The technical reason the company headed to court is that it effectively got a margin call on debt backed by its fleet of cars when the refinancing market was also all but shut down.
- Hertz stock was around $3 at the time and shot up as high as $6.25 in June.
- The stock euphoria was ignored and ridiculed by investors who thought they knew better — mostly in the bond market. The company's unsecured bonds were trading at a mere 30 cents on the dollar, and they stood in line to be repaid in full with funds from a bankruptcy sale — ahead of the stock.
Yes, but: Soon after Hertz filed, people were already renting cars again, for a summer travel season that would lack the option of European vacations or flying to islands.
- An unexpected bidding war this past month resulted in billions more to hand out to pre-bankruptcy investors, compared with Hertz's original debt repayment plan.
The bottom line: The rapid fall and quick recovery in the economy and markets created many winners and losers. Hertz shareholders were among the lucky.