The Strange Saga Of Hertz, The Bankrupt Company Trying To Sell Nearly Worthless Shares

On Wednesday, trading in shares of Hertz Global Holdings Inc. (HTZ), the bankrupt auto rental agency, were halted after the Securities and Exchange Commission informed the company it had concerns about its planned public stock offering.

“In this particular situation, we have let the company know that we have comments on their disclosure,” said SEC Chairman Jay Clayton. “In most cases when you let a company know that the SEC has comments on their disclosure they do not go forward until those comments are resolved.”

Hertz has been busy in recent weeks. On May 22, the company filed for bankruptcy as the covid-19 pandemic wiped out demand for auto rentals. At the time of its bankruptcy filings, the company had almost $20 billion in debt.

Last week, Hertz appealed a delisting request by the New York Stock Exchange. Then, it filed for a public offering in a desperate effort to raise cash.

Meanwhile, even through the bankruptcy proceedings, Hertz shares staged a miraculous comeback. After hitting an intraday low of $0.40 per share on May 26, the stock soared to an intraday high of $6.25 on June 8 before settling that day at $5.53. (Since then the stock has dropped to $2 as of Wednesday’s closing).

According to reports, shares in Hertz may have spiked on Robinhood, a trading app favored by younger investors.

Still, why would anyone buy stock in a bankrupt firm?

Andrew Hill, of Andrew Hill Investment Advisors in Naples, Fla. commented that investors still buying Hertz stock likely don’t understand what bankruptcy means.

"I suspect that a lot of people investing today don't know what bankruptcy is about and don't have a clue that shareholders come last," Hill said. "It's interesting. I think there is a lot of new money that has come in that's been highly speculative, from what we call retail investors. They have moved the markets, and it's good to have an element of speculation in the equity markets. Otherwise, without these investors, the money markets would never perform."

In any case, the unexpected increase in the share price likely inspired Hertz to hold a public offering – the bankruptcy court approved its request to sell up to $1 billion in shares. On Monday, the company said it would sell up to $500 million in common shares – while repeatedly stipulating that Hertz’s equity will likely become worthless (meaning potential investors will lose their money).

Analysts have remarked how unusual it was for a company ensnared in bankruptcy proceedings to propose such a large sale of common shares – holders of which are usually last in line when the bankruptcy court hands out company assets.

Specifically, Hertz warned in the filing: “We are in the process of Chapter 11 reorganization cases under the bankruptcy code, which may cause our common stock to decrease in value, or render our common stock worthless.”

The company also warned it might not be able to keep its listing on the NYSE, which could have "a material adverse effect on the liquidity of our common stock."

Now, as a result of the SEC, Hertz has suspended its plan to sell the $500 million in shares “pending further understanding of the nature and timing of the [SEC] staff’s review.”

It is unclear what exactly SEC objected to in Hertz’s offering filing.

“We at the SEC… are trying to carry out our responsibility in the situations like this as best we can and I expect the other professionals around the situation to carry out their responsibilities as best they can,” Clayton added.

Jerry McHale, a bankruptcy expert based in Fort Myers, Fla., suggested that investors who would buy Hertz stock now would probably be speculators assuming that "ultimately debt holders will wind up with equity and the existing equity would be diluted, but not so much that it wouldn’t have some value and potentially trade and show some appreciation."

So, where does Hertz stand now?

Deutsche Bank analyst Chris Woronka thinks Hertz may try to sell up to 30% of its fleet to raise additional cash.

“At some point the company will need to ‘turn over’ its existing fleet and purchase new vehicles as replacements in order to offer customers a competitive product,” he said. “We believe the natural cycle suggests this would likely need to occur ahead of the summer 2021 peak. It's unclear to us whether [Hertz] will have ample liquidity (or borrowing power) with which to fund new fleet purchases, particularly since the existing fleet will have moved further down the depreciation curve relative to where a fleet on a ‘normal’ replacement cycle would be at that time (since [Hertz] did not replace those vehicles with new ones this summer).”

Harvey Pitt, a former chairman of the SEC, said a public offering by a bankrupt Hertz would raise risks for any banks involved in the sale.

“Investment banking firms have liability, and when they offer securities one of the issues that will come to bear is whether these investments are suitable,” Pitt said. “To my way of thinking, an investment banking firm runs the risk of effectively selling a litigation claim. Because at the end of the day, if this operates the way it ought to, it’s like musical chairs and someone is going to be left without a seat.”

Pitt also contended that the SEC likely did not expect Hertz to pursue a stock sale under these circumstances.

“As an intellectual proposition, most securities experts had always thought you could offer garbage for sale to the public as long as you said ‘we are offering you garbage, and you really shouldn’t buy this but you have a chance to buy it,’” Pitt said. “No one ever really anticipated that people would be gullible enough to do that.”

Jim Collins wrote in Forbes that Hertz shares are worthless and investors should simply avoid buying them.

“If you think the SEC is going to protect you, the individual investor, you are sorely mistaken,” Collins wrote. “Please don’t make the expensive mistake of thinking there aren’t no more Hertzes out there.”