What happened
Shares of Avis Budget Group (CAR -0.34%) and Hertz Global Holdings (HTZG.Q), well-known vehicle rental companies, and the nation's largest auto retailer AutoNation (AN -0.31%) declined 10% early Wednesday after concerns that plunging used car prices could be exacerbated by a possible Hertz bankruptcy -- a development that would send ripple effects across the auto industry.
So what
As you can see in the graph above, Avis and Hertz have been decimated by the COVID-19 coronavirus pandemic and the economic and travel restrictions it brought. In fact, Avis expects April and May to post a crippling 80% decline in revenues, which is one reason the company tapped the junk bond market for $500 million to help weather the COVID-19-driven economic downturn. Making matters worse for Hertz was a report that used car wholesale prices plunged 11.4% in April, and as the value of Hertz's fleet declines, the company is forced to make up the difference, with lenders that financed its fleet, in cash -- a scenario that has investors questioning if Hertz can make such a payment. In Hertz's first-quarter filing, management made it clear how dire the situation is: "As such, management has concluded that there is substantial doubt regarding the company's ability to continue as a going concern within one year from the issuance date of this quarterly report on form 10-Q,".
Image source: Getty Images.
Now what
Hertz was given a lifeline by lenders and has until May 22, 2020 to develop a financing strategy appropriate for the current economic scenario, giving investors a moment to contemplate what a bankruptcy would do to the broader industry. It's a complicated situation for all involved. Carl Icahn holds a 39% equity stake in the company and could infuse the business with cash to stay afloat, but if the company doesn't recover and a bankruptcy takes place, equity holders' claims are behind creditors', making it a risky move for Icahn. A potential Hertz bankruptcy could also flood an already suffering used car market with several hundred thousand vehicles, which would send prices even lower and add supply that might take years to return to normal levels. That's a development that would hurt new car sales, which would negatively impact manufacturers as well as new-vehicle dealerships such as AutoNation, if consumers have a compelling and far cheaper used car substitute. It would be painful to used car dealerships as their transaction prices and inventory/asset values fall. Lower used car prices will send a ripple effect many didn't see coming.
