Everybody Hertz, sometimes...
Hertz ($HTZ) stock went up over 500% after filing for bankruptcy - here's why...
"When your day is long
And the night
The night is yours alone
When you're sure you've had enough
Of this life
Well hang on
Don't let yourself go
'Cause everybody cries
And everybody hurts sometimes"
Everybody Hurts - R.E.M.
This One Hertz
If you keep up on market news and musing, you know as well as we that there is something near daily more bonkers than the last. And just when you think the last one is as far as things can go, something new pops up that takes things another step further. Being a pre-revenue something something going public at a $10B pre money valuation with the backing of SoftBank doesn’t even make the top ten anymore.
The latest - the proposed Hertz equity issuance.
Hertz filed for bankruptcy in May 2020. The Company’s business, vehicle rental, was materially impacted by the massive decline in travel due to the COVID-19 pandemic. Its non-airport business has been hurt by the decline in miles driven and increase in working from home resulting in fewer accidents and the related need to rent vehicles during repair. News of the filing came with the typical comments wherein Hertz mentioned its plan to emerge with less debt and a leaner business, better positioned to operate in the markets, etc. etc. etc.
And then a funny thing happened...Hertz’s stock, which is all but certain to be cancelled and worthless, started trading A LOT. While it’s not atypical for a bankrupt company with public equity to see meaningful trading activity, Hertz is by far an outlier. It is common to see micro market cap stocks go haywire during bullish markets. However, we are not in a bull market, nor is Hertz a micro cap stock. So why the sudden spike in volume? Retail traders. The COVID-19 pandemic inspired a wave of sports bettors, gamblers, and US citizens with $1,200 pandemic relief checks to jump into the stock market for the first time. Over half of these individuals are first-time traders (source). The likes of Dave Portney, founder of Barstool Sports, and affiliated audiences have since coined these traders as “Robinhood Traders” due to their reliance on the original free trading app that has successfully grown a younger demographic than most other mainstream brokers. These “Robinhood Traders” only know one thing since their first time in the market at the bottom of the COVID-19 drop in March - Green, green, green! They have only ever seen a market go up and with zero explanation.
”Say it with me... Stocks only go up. Only losers take profits.”
This disconnect to market cycles has led to a mass belief in the idea that the stock market only goes up. The number of Robinhood users holding shares of Hertz is currently 171,600 compared to 43,400 the day before they filed for bankruptcy support on May 21st. That’s a 295% increase! (https://robintrack.net/symbol/HTZ)
Now a wild move as seen in Hertz starts to make more sense from the wave of hysteria in this near V-shaped market recovery from the 2020 Coronavirus Recession. More sense from a social reflection point of view, not from a smart trading point of view. The majority of traders entering positions in this Hertz ($HTZ) bankruptcy play don’t seem to know what bankruptcy means for a stock or company. That’s why the company had to issue public statements saying the shares will likely become worthless! You reader, can be smarter than the average Robinhood Trader, however. So let’s go over what a bankruptcy actually means in the trading and investing world…
What SHOULD "bankruptcy" mean?
In a typical bankruptcy case, the bankrupt company will need new money to fund working capital (usually trade lenders will reduce terms, maybe all the way to cash and carry) and perhaps process related expenses (legal and financial advisors). This is typically funded through a Debtor-In-Possession loan, or DIP loan for short. The bankruptcy code allows for these loans to take priority liens over existing loans on collateral. While not cheap, these loans typically carry rates that fall somewhere in-between regular way bank loans and high-yield.
Wall Street can be creative in ways that can be shocking, dear reader. On June 12th, the U.S. Bankruptcy Court for the District of Delaware granted Hertz approval to sell up to $1 billion in shares. Read that again. And again. And again. Hertz is going to sell shares, equity, the junior most security in the capital structure, at the same time its senior unsecured bonds (senior to the equity in the capital structure) are quoted at ~30/40 cents on the dollar…
...at the same time the Company has disclosed intent to delever through bankruptcy (convert debt to equity)...at the same time advisors working on the case have all but said these new shares are going to end up being with $0 (I have found that lawyers who are 100% certain will never give you more than 70% certainty, just in case, fyi).
So many feelings...so many…
- If you don’t ask, you will never get. Maybe it’s that simple...maybe this is just that and other bankrupt companies were thinking about this but decided not to ask. I imagine more will going forward, all else being equal. That being said this is INSANE.
- The disclosures in the equity offering documents are there (so I have seen so far). Buyer beware, these shares are probably worth $0 in the end. This is a punt, a hot potato, musical chairs all the way absent some massive turnaround in the business before emergence from bankruptcy that support value through the equity. The credit markets aren’t suggesting this by any means, but maybe they are wrong...probably not but MAYBE.
- Are people going to sue...Hertz, underwriters, exchanges, everyone...when the stock is cancelled and worthless? It seems like yes, even though the disclosures are there. How are the parties involved thinking about that risk? As I type I can convince myself that the related liabilities might sit in the estate and get litigated after the fact as the new Hertz carries on with its business.
- Should companies sell stock that they probably full-on know is worth $0 just because they can, can find legal paths to allow it and can find the demand to buy it?
- What does an offering like this do to the public perception of the stock market? For us, this is pure speculation and NOT a good situation to endorse.
- The people holding the bag in the end are likely retail traders. Do they really understand the dynamics here and despite the disclosures, should there be more protection to prevent the total losses that are going to occur when the stock is cancelled?
Maybe like us you saw this as a cruel joke and at some point hoped the Wizard would appear from behind the curtain and reveal the truth...or maybe this is how far things have devolved for the public equity markets in 2020.
Edit (6/17/20): Alas dear reader, the Wizard did appear in the form of an SEC review of the proposed offering (https://www.sec.gov/ix?doc=/Archives/edgar/data/47129/000110465920074139/tm2022223d3_8k.htm). Thank you powers that be for saving ourselves from ourselves yet again. If you are anything like us, you are now returning from your forward post completely shell-shocked, ready to stand at the ready for whatever batshit crazy thing happens tomorrow...maybe Enron is going to issue new equity?????
Did you trade $HTZ during this bankruptcy announcement? Let us know on our Twitter - we'd love to hear your perspective!
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