Hertz Secures $1.65B; This Changes Nothing.

Hertz (NYSE:HTZ), is a major American car rental company that operates in more than 10,200 corporate and franchisee locations internationally and has almost 500,000 cars. It filed for bankruptcy on the 22nd of May due to its incapability to pay back ABSs.

To facilitate the huge fleet that Hertz operates, instead of paying cash upfront, Hertz used its own vehicles to leverage credit. With profit coming from their rental and franchises, they hoped to pay off the debt. This model of using asset-backed debt posed several risks, the most paramount being that the debt depending on the assets’ (cars) value. As a result, should the value of Hertz assets nosedive, lenders are allowed to adjust the terms of the loans to reflect the higher risk. Furthermore, since Hertz’s car rental locations are largely located next to airports, it was particularly susceptible to a decrease in travel and what’d you know, both of the aforementioned came true! Due to the pandemic, both used car values and the number of people travelling decreased significantly.

These risks have been acknowledged by Hertz in the past evident in a 2014 SEC report that stated, ‘Our car rental business, which provides the majority of our revenues, is particularly sensitive to reductions in the levels of airline passenger travel, and reductions in air travel could materially adversely impact our financial condition, results of operations, liquidity and cash flows'.’

Until recently, HTZ stock price was decimated; 97% down from its March price of $20.35. That is until yesterday, when Hertz announced it had secured $1.65 billion in debtor-in-possession funding to make it through bankruptcy and the pandemic. This sparked renewed interest amongst risk-hungry traders despite Hertz’s fragile financial conditions.  By market close, shares had reached $2.50, a 142% increase.

Yet, I am of this firm belief that Hertz securing funding changes nothing about the fundamental business. It is still in the same fragile and unattractive condition that it was in 2 days ago. In fact, its possible that this loan would have further weakened Hertz’s financial position, as this just adds to the $19 Billion mountain of debt it already has.

Paul Stone, the company’s CEO issued a press release stating that, ‘This new financing will provide additional financial flexibility as we continue to navigate the pandemic's effects on the travel industry and take steps to best position our business for the future,’.

It is more than likely that Hertz will continue to be in the automotive rental industry in a post-pandemic. After all, the company has a huge fleet and established locations across the globe. After restructuring however, companies usually issue new stock, making the pre-reorganization stock, in this case HTZ, worthless. Examples of these include American Apparel, Fairway, Barneys and RadioShack.

Other than filing for bankruptcy and issuing new shares, the abovementioned shares have another thing in common, they are all part of the notorious ‘Chapter 22 Companies’. In that, they all filed for bankruptcy again shortly after restructuring. This is also a serious possibility. Bad management, prolonged wait for vaccines and permanent decrease in travel amongst other factors could lead to Hertz going down the same route and filing for bankruptcy again.

In addition, the average car rental industry growth in the US has gone down by 11.4% from 2015-2020as consumers rather use services such as Uber and Lyft instead of going through the hassle of renting cars from business such as Hertz, and this trend will more than likely continue. In addition, air travel is only set to recover to pre-pandemic levels in 2024, with Hertz's locations being concentrated near airports, it would also be safe to assume that its revenue would recover at about the same time.

In conclusion, do not be fooled by HTZ’s 142% spike, its only temporary. Given Hertz’s and the car rental industry as a whole’s condition, it is wise to watch from the sidelines and wait until Hertz undergoes restructuring and issues new shares before purchasing stock.