May 13, 2021 - Economy

Hertz shareholders in line for $8 recovery under bankruptcy plan

Picture of a phone screen with the Hertz logo on it. The phone is placed in front of a wall with the Hertz logo also on it.

Photo Illustration by Pavlo Gonchar/Getty Images

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.

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