It’s the version of David versus Goliath that Wall Street will like. Day traders, snapping up penny stocks on the popular Robinhood app, sought to defy decades of convention and make money on bankrupt rental-car company Hertz. The craze sent shares soaring as much as 896%, prompting Hertz to briefly capitalize on the frenzy by issuing even more stock.
The conclusion, outlined Tuesday in a reorganization plan to end Hertz Global Holdings Inc.’s nine-month trip through Chapter 11, is a cautionary tale for the little guy. Holders of Hertz shares, which traded for as much as $2.53 just three months ago, will get nothing. Hertz’s lenders, who include some of Wall Street’s giants of distressed investing, will be paid in full after collecting millions in fees and interest payments for financing the company’s reorganization.
The plan values the reorganized company at nearly $5 billion, and fully repays Hertz’s first-lien and second-lien creditors. Unsecured bondholders would get the option to take a cash payout of 70% of their investments’ face value or roll their debt into new financing, according to a Hertz statement.
The list of potential winners includes some of the biggest players in the specialized world of bankruptcy debt investors, who try to snap up bonds and loans at pennies on the dollar and push for a higher recovery in court: affiliates of Aurelius Capital Management and D.E. Shaw held unsecured notes that could collect most of their face value, while Silver Point Capital and Contrarian Capital Management had senior term loans that would be repaid in full.
Lenders behind a $4 billion package of loans Hertz arranged after it filed bankruptcy will also do well. Apollo Global Management and other lenders were set to collect nearly $45 million in upfront fees on two loans Hertz took out to refresh its vehicle fleet and fund its bankruptcy case. One of those, a so-called debtor-in-possession loan, paid 7.25 percentage points above the London interbank offered rate.
Meanwhile, equity investors who paid as much as $5.53 a share for Hertz after the company filed for bankruptcy will be wiped out.
It wasn’t as if equity investors weren’t warned. Even as Hertz tried to sell more stock last year, it said the shares would likely end up worthless. The company’s plans prompted scrutiny from the U.S. Securities and Exchange Commission and were quickly shut down, but not before Hertz managed to unload 13.9 million shares for about $28 million, according to court documents.
Hertz’s saga foreshadowed a frenzy among retail investors for stocks shunned by professionals, becoming among the first so-called “meme stocks” to take off after chatter on retail investor forums like Reddit’s Wall Street Bets community. Months later, euphoria for video-game retailer GameStop Corp. set off a 2,728% rally before shares came crashing down and wiped out about $30 billion in market value.
Hertz shares fell 24% to $1.25 at 2:14 p.m. Tuesday in New York.
Under a proposal filed Tuesday, Knighthead Capital Management and Certares Management would buy Hertz out of bankruptcy, according to court documents. The investors would own about 51% of new, common stock to be issued under the plan, which needs court approval.
The bid is backed by a travel industry-focused investment fund that Knighthead and Certares created last year to take advantage of an expected rebound in companies that were disrupted by the Covid-19 pandemic.
The rental-car company would have $1 billion of new first-lien financing, a $1.5 billion revolving credit facility and a new asset-backed securitization facility under the deal.
Hertz filed for bankruptcy in May when the near-total shutdown of the global travel industry sent its rental revenues plunging.
The case is Hertz Corp. 20-11218, U.S. Bankruptcy Court, District of Delaware (Wilmington). To view the docket on Bloomberg Law, click here.
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