Shares of Hertz (HTZG.Q), a vehicle rental company in the middle of bankruptcy, is soaring over 50% higher today. Hertz, which has filed for bankruptcy and has shares that will likely go to zero, wants permission from bankruptcy court to issue more shares to take advantage of the hugely speculative rise in the company's stock price since its bankruptcy filing. It's not April 1, is it?
There isn't a great way to describe this development other than to say that nobody thought Hertz stock would rise the way it has in recent weeks, including Carl Icahn, who had sold his 55 million shares, a roughly 39% stake, at a massive loss. Essentially, bankrupt stocks are forced to satisfy debt with their lenders before any value is handed down to common shareholders. Generally, common shareholders are left with nothing, and Hertz has a massive $19 billion pile of debt that must first be satisfied before common shareholders see a dime.
And here's the crazy part: The company, according to The Wall Street Journal, called this "a unique opportunity" that would essentially take advantage of its controversial and speculative higher share price to issue new shares and generate cash to help satisfy its lenders. For long-term and unsuspecting investors, this is a nightmare. Hertz is asking a bankruptcy court to approve its move to sell nearly 250 million unissued shares to Jefferies LLC, which could raise more than $750 million at current prices, and Hertz even noted that it would warn that these shares could end up worthless, too.
While this certainly looks like a cash grab by the company to get more value to pay its lenders, it's possible raising this cash could give the company a longer lifeline -- remember, the company is labeled essential and is using its cash on hand to continue operations while the bankruptcy is worked out -- and if air travel and transportation bounce back, it would improve the company's leverage in bankruptcy process. After all, if lenders that Hertz is unable to satisfy are to take an equity position in a new and restructured Hertz to recoup value from their initial loans and investments, the new Hertz would be more attractive in a rebounding economy. Hertz and the trading of its stock has been a head-scratcher since it filed for bankruptcy, and individual investors would be wise to watch this nightmare unfold from the sidelines.