Car rental giant Hertz (NYSE: HTZ) filed for Chapter 11 bankruptcy protection late Friday, hours ahead of a creditor forbearance deadline on a nearly $11 billion agreement with some of its asset-based lenders that lease vehicles to Hertz’s U.S. rental car operations.
After failing to reach an agreement with some of its creditors, Hertz had little choice but to enter a free-fall, Chapter 11 proceeding without sufficient time to plan, according to Joseph Acosta, a partner at Dorsey & Whitney.
“These can be the most expensive types of bankruptcies, where many a behemoth have not survived,” Acosta said in a statement to FreightWaves. “Hertz may have little choice but to scale down its operations and sell assets to pay down its significant secured debt. Hopefully, the restructuring expenses will not bury the company in the process.”
“The asset-based lenders that lease vehicles to Hertz’s U.S. rental car operations (“US RAC”) previously entered into a forbearance of their rights to cause Hertz to liquidate its fleet of leased vehicles to pay the almost $11 billion in secured debt owed to these lenders,” Acosta said.
“Such liquidation would have a devastating effect on Hertz’s U.S. RAC segment, which generates over two-thirds of its revenues.”
Acosta, who is not involved in the Hertz bankruptcy proceedings, specializes in complex restructurings, Chapter 11 bankruptcies and litigation projects in the U.S.
Estero, Florida-based Hertz Global Holdings — parent of The Hertz Corp. — started the year with strong revenue and earnings momentum , according to Paul Stone, Hertz’s new chief executive.
“With the severity of the COVID-19 impact on our business, and the uncertainty of when travel and the economy will rebound, we need to take further steps to weather a potentially prolonged recovery,” Stone said in a release. “Today’s action will protect the value of our business, allow us to continue our operations and serve our customers, and provide the time to put in place a new, stronger financial foundation to move successfully through this pandemic and to better position us for the future.”
Earlier this week, Stone replaced Kathryn V. Marinello as CEO.
Hertz Global posted a net loss of $356 million, and its adjusted corporate earnings before interest, taxes, depreciation and amortization (EBITDA) was negative $243 million in the first quarter of 2020.
While the company has approximately $1 billion in cash on the balance sheet, it has a total outstanding debt load of around $17 billion.
The rental car company has a fleet of more than 560,000 vehicles in North America, with an additional 200,000 internationally.
Despite furloughing 20,000 employees that made up nearly 50% of its global workforce and canceling 90% of its remaining model year 2020 fleet orders in a $2.5 billion cost-cutting effort, it wasn’t enough to stave off bankruptcy.
In its filing with the U.S. Bankruptcy Court in Wilmington, Delaware, Hertz lists both its assets and liabilities as ranging between $10 billion and $50 billion. It lists more than 100,000 creditors in its bankruptcy petition.
“Hertz is a $25 billion company that is highly leveraged and dependent on significant operating revenue to service its debt and maintain its vehicle rental and leasing business,” Acosta said. “The Coronavirus came at a bad time for Hertz.
Marinello, Hertz’s former chief executive, said Hertz’s revenue trend went into free fall in April after the U.S. government suspended international travel, states enacted lockdowns and resale auctions sent employees home.
Closely linked to its effect on the rental car industry, the pandemic has cripped the travel, tourism and hospitality industries as well.
After a 5% uptick in passenger volumes in January and February, global travel bans and stay-at-home orders put in place in March and April led to a 93% drop in passenger travel in mid-May, according to Airlines for America.
Hertz derived 66% of its revenue from airport rentals in 2019, according to its fourth-quarter and year-end filing.
Prior to Hertz’s bankruptcy, analysts held out little hope that the second-largest car rental company’s finances would improve adequately by Friday to satisfy bondholders.
“They’ve been an underperformer for at least the last five years, and honestly for more than a decade,” said Daniel Pickett, chief data scientist at FreightWaves, a few days prior to Hertz’s bankruptcy filing. “Hertz wasn’t strong before this as they carried a lot of debt, but I think COVID-19 accelerated some problems that they might have been able to wiggle their way out of before the pandemic. However, it’s unlikely they will be able to do that now.”
Hertz’s Chapter 11 filing has serious implications for the new and used car markets, according to analysts and industry insiders.
If Hertz is forced to sell off some of its fleet, it could potentially flood the used car market with several hundred thousand cars, triggering a price collapse.
April used car sales fell more than 34% from 2019, according to Manheim.
“Hertz’s bankruptcy might have a significant effect on the automobile retail market because Hertz was a constant purchaser of fleets of new vehicles, creating a demand, and because Hertz’s liquidation of its older line might flood the market with cheaper vehicles,” Acosta said.
This is a developing story.
FreightWaves’ Noi Mahoney contributed to this report.
