Shares of Hertz Global Holdings (NYSE: HTZ), a car rental company undergoing bankruptcy, rose sharply above 128% on Friday afternoon after news broke that the company had secured $ 1.65 billion in financing – but here’s why investors should temper their enthusiasm.
At first glance, investors might think that Hertz securing $ 1.65 billion in financing to continue operations during the bankruptcy process would be a good thing – especially considering the stock price jumped over 128%. But let’s first explain what debtor-in-possession financing is and what it means for investors. Financing of debtor in possession is only available to bankruptcy firms. It is used to organize the reorganization and let the company raise capital to continue operations while the bankruptcy process continues.
While the financing seems like a positive development, the opposite may be the case for Main Street investors. Hertz already has a mountain of debt, and nearly $ 15 billion of the total debt of $ 19 billion is tied to the company’s vehicle fleet. At the end of the day, the major lenders who helped finance the company’s vehicle fleet, including major lenders, will receive the value left by Hertz, whichever path they choose, be it liquidation or restructuring and owning shares. in a new company. Whatever is left after the major lenders negotiate their fair share, they are distributed to common shareholders – and there is a good chance that there is no value left for common shareholders with Hertz’s high level of debt. Now there is another 1.65 billion. Dollars in debt from people who will hit the bargaining tables long before common shareholders, making it even less likely that common shareholders will get any value.
“This new funding will provide additional financial flexibility as we continue to navigate the effects of the pandemic on the travel industry and take steps to position our business in the best possible way for the future,” Hertz President and CEO Paul Stone said in a press release. This statement may be true and may also be a little misleading. If you take one thing away from this article, let it be that Hertz may indeed have a future in the car rental industry, but it will almost certainly be like a restructured company trading under new shares and the Hertz shares we know and trading today will likely end up worthless. Don’t let the financing hype and 128% stock price pop fool you, you need to see this from the sidelines; there are many more exciting car investments out there.