Wow, we didn’t see this coming. Hertz Global Holdings, the parent company to Hertz Rental Cars have been in discussions with creditors. No one is renting cars because few are traveling due to the pandemic. Over the last couple of months its stock has tanked. At $20.29 per share in February it has fallen to $2.86 a share. Yikes! It has until today to get some love from its creditors or it will need court protection from the $400 million in lease payments that are due. Now insiders witnessing the discussions say creditors are looking at Hertz Rentals selling its assets and liquidate. This would get them whole in the short term rather than extending bond debt indefinitely.
Why liquidate? Cars aren’t like fine wine-they don’t increase value with age
Hertz has already canceled 90% of the vehicles it ordered for 2020. But it is still sitting on over 750,000 vehicles. They’re worth less each day that passes so creditors are saying liquidate now and we’ll get more than if we wait. If things don’t rebound quickly Hertz could be sitting on 750,000 depreciating assets that could never cover the debt.
The idea of Hertz looking to liquidate has been given more consideration as used-vehicle prices increased slightly in May. As Automotive News put it, “Back in April lenders were more willing to be lenient to avoid selling the vehicles financed by asset-backed securities into a deeply depressed market.”
By the middle of April prices dropped 15% from their earlier highs at the beginning of the year. But since then prices have risen to put their depreciation to less than 10% now. But it is a double-edged sword. By getting rid of the cars sooner it maximizes the return before depreciating further. But selling off 750,000 vehicles could instantly depress the market dropping their value significantly in the process.
Icahn’s investment in Hertz Rentals has tanked from $1.6 billion to $170 million
Carl Icahn is Hertz’s largest shareholder. Automotive News says from a $1.6 billion total investment he’s made over the years its value is now around $170 million. He could come in with a rescue plan but it would face opposition by bondholders who have been buying Hertz debt on the cheap. Why are they buying it? To offset a short bet in the credit-default swap market.
There are already repercussions from Hertz’s new car cancellation. It normally has over 500,000 vehicles in its US rental fleet and over 200,000 at its international operations. Typically it keeps vehicles in its US fleet for 18 months and in the international fleet for 12 months. So it won’t be purchasing a few hundred thousand vehicles this year.
Here’s who is affected by Hertz Rentals canceling its new-car orders for 2020
Hertz buys 21% of its fleet from GM, 18% from Fiat-Chrysler, 12% from Ford, 10% from Kia, 9% from Toyota, 7% from Nissan, and 5% from Hyundai. So there’s your rundown of manufacturers affected by the Hertz situation from most to least.
The possibility that Hertz might liquidate is not pretty and doesn’t bode well for investors whichever way it goes. The COVID-19 crisis is having far-reaching effects no one could have imagined back in March.