Tough times create big problems for many companies, and inevitably, there are casualties when unexpected financial turmoil hits. With the COVID-19 pandemic, Hertz Global Holdings (NYSE:HTZ) proved vulnerable to unprecedented health and safety measures that brought the travel industry to a standstill. With hundreds of thousands of vehicles sitting idle, Hertz burned through cash at a scary rate and eventually sought bankruptcy protection to fend off its creditors.

Usually, shares of companies move close to zero fairly quickly after declaring bankruptcy. Hertz has been the exception, with some optimistic investors placing big bets on the rental car company despite its ongoing woes. Stock markets are supposed to be efficient, so I decided to take a look at the most bullish case for Hertz to see if any of the recent buying in its shares makes sense. Here's what I found.

Worker handing paper to customer across a counter, with Hertz logo in background.

Image source: Hertz.

Hertz itself thinks the stock is likely to go to zero

When Hertz saw its stock still trading at a price significantly above zero, it decided to take the opportunity to try to do something that might never have been done before: sell potentially worthless stock to willing investors in the middle of a bankruptcy proceeding. In the hopes of raising hundreds of millions of dollars to help it pay off creditors, Hertz generated prospectus documents to meet compliance requirements and prepare for a stock offering.

Hertz was careful to list massive risk factors in its disclosure documents. The most relevant one to shareholders is Hertz's assertion that "we expect that common stock holders, including purchasers in this offering, will not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured and unsecured indebtedness (which is currently trading at a significant discount), are paid in full." The rental car giant therefore believes that there's a huge risk that the common stock will get no recovery and be worthless.

The SEC almost certainly thought the stock would go to zero

Despite its acknowledgement of the risks, Hertz was willing to contemplate an offering to willing buyers of its stock who were fully aware of the dangers involved. However, the U.S. Securities and Exchange Commission wasn't so sanguine about the prospects for letting inexperienced investors lose all their money in a secondary offering in bankruptcy.

Shortly after Hertz filed its prospectus with the SEC, the company got a notification from the SEC's Division of Corporation Finance. That's how Hertz found out that regulators intended to review the filing, likely communicating its concerns about moving forward with the sale of stock. Only a few days later, a committee of Hertz's board of directors made a determination that it was in the best interest of the company not to do the offering and to terminate its stock sale program.

Investors in Hertz debt think the stock will go to zero

In bankruptcy proceedings, bondholders are the most important group of investors that Hertz has to please. No plan of reorganization could give stockholders anything without paying bondholders in full, unless Hertz could convince those bondholders otherwise.

That's not likely to happen. Already, creditors are fighting with Hertz over how to handle the roughly half million vehicles that support its asset-backed securities. Hertz wants to reject current terms on some vehicles but keep them on others, while bondholders might prefer to force the rental car company to accept or reject the terms for the entire set of vehicles as a whole.

Moreover, bond investors don't expect to come close to recovering all their money. One set of Hertz Bonds recently traded between $30 and $35 per $100 of value, showing just how skeptical bondholders are about their prospects. Facing big losses, those investors aren't going to let shareholders get a penny.

The only hope

Just about the only way that Hertz shareholders would be able to get any recovery in the bankruptcy proceeding is if the economy reopened, travel demand spiked higher, and used vehicle prices rebounded sharply. That confluence of events isn't impossible, but it's not too likely. Far more probable is that Hertz will continue to move through the bankruptcy process and eventually agree to a plan that leaves shareholders with nothing. With so many better stocks out there, that makes looking at buying Hertz stock right now crazy talk in my book.