Shares of Hertz Global Holdings (HTZG.Q), a vehicle rental company going through the bankruptcy process, soared over 128% Friday afternoon after news spread that the company secured $1.65 billion in funding -- but here's why investors should temper their excitement.
At first glance investors might think Hertz securing $1.65 billion in funding to continue operations during the bankruptcy process would be a good thing -- especially considering the stock price jumped over 128%. But let's first explain what debtor-in-possession financing is, and what it means for investors. Debtor-in-possession financing is only available for companies in bankruptcy. It's used to orchestrate the reorganization and allow the company to raise capital to continue operations while the bankruptcy process continues.
While the funding seems like a positive development, the opposite might be true for Main Street investors. Hertz already has a mountain of debt and almost $15 billion of its total $19 billion of debt is linked to the company's vehicle fleet. At the end of the day the major lenders that helped finance the company's vehicle fleet, among other major lenders, will receive whatever value is left of Hertz in whatever path they choose, be it liquidation or restructuring and owning shares of a new company. Whatever is left after the major lenders negotiate their fair share will be distributed to common shareholders -- and there's a good chance there will be no value left for common shareholders with Hertz's high debt levels. Now, there's another $1.65 billion of debt from people that will hit the negotiation tables long before common shareholders, making it even less likely common shareholders receive any value.
"This new financing will provide additional financial flexibility as we continue to navigate the pandemic's effects on the travel industry and take steps to best position our business for the future," said Hertz president and CEO Paul Stone in a press release. That statement can be true and can also be slightly misleading. If you take one thing away from this article let it be that Hertz may indeed have a future in the vehicle rental business, but it will almost certainly be as a restructured company trading under new shares, and the Hertz shares we know and trade today will likely end up worthless. Don't let the funding hype and 128% stock price pop fool you, you should watch this from the sidelines; there are many more intriguing automotive investments out there.