COVID-19 claimed a major corporate victim when Hertz (HTZ +0.00%) filed for bankruptcy protection last Friday. A question many investors might be asking right now amid this flurry of news is: Should I sell Hertz stock?
The answer is almost certainly yes. For more context, investors must better understand the situation facing Hertz and why its lenders refused to grant the rental company an extension on its auto lease debt payments. Hertz made a risky bet when it essentially financed a chunk of its massive vehicle fleet using asset-backed securities. The risk in doing that is that if the value of used cars fell -- as it certainly did during the COVID-19-fueled economic slump -- Hertz would be required to make up the difference in that lost value with cash payments to lenders.
So what did the Hertz situation look like, exactly? In rough terms, a 1% drop in vehicle value would require about $75 million in cash to remain in compliance. Wholesale prices of used cars dropped 11.4% during April -- a staggering blow to Hertz, which has about $1 billion in cash to support its operations.
Image source: Getty Images.
Here's why you should probably sell, if you haven't already. Hertz has about $19 billion in debt, and a massive $15 billion chunk of that is from issued bonds to purchase its fleet. When you consider that lenders opted to not give Hertz time to turn its business around, it's likely because they think they can get a good amount of money back if the company's assets are liquidated. It is possible the lenders could let Hertz restructure, or a number of other possibilities, but if it does liquidate, the lenders will be first in line to get a massive chunk of the liquidated proceeds. Carl Icahn, a 39% stakeholder of Hertz, will also be in line clamoring for his fair share.
There are a lot of ways this could play out, but if you're an individual investor still holding shares, it might be time to bite the bullet, because there are some very big fish who want as much of Hertz's remaining value as possible, and it's possible little to no value will remain for common shareholders. The New York Stock Exchange is beginning the process to de-list Hertz, but as an essential company, it will continue operations until everything else is sorted. This is a reminder to investors that broader markets will rebound from COVID-19, but not all companies have the liquidity to weather the storm. Invest wisely.
