Shares of bankrupt vehicle-rental company Hertz Global Holdings (HTZG.Q) jumped almost 20% in early Monday trading -- likely riding some momentum from Friday's $1.65 billion debtor-in-possession financing -- before reversing and giving back all those gains. Here's what investors need to keep in mind.
After social distancing crippled travel and Hertz's rental demand, the company filed for bankruptcy protection on May 22 in a move that generally wipes out shareholders. Even famous billionaire hedge fund manager Carl Icahn threw in the towel and sold his more than 55 million shares.
Despite the likelihood of current Hertz shares ending up worthless for common shareholders, there continues to be a strange disconnect between the stock price and the reality of Hertz being a bankrupt company. That disconnect was in full force on Friday when the stock more than doubled as the company announced it had secured (subject to bankruptcy court approval) $1.65 billion in debtor-in-possession financing. That would enable Hertz to raise cash to continue operations while it finishes negotiating its bankruptcy with lenders.
Hertz will have a number of options, but it will have to satisfy major lenders that have financed its roughly $19 billion in debt before it can possibly offer common shareholders any value. The new financing will help the company operate while it restructures, but it simply puts more major lenders in front of common shareholders at the negotiating table, which makes an already small chance of shareholders receiving any value even less likely.
What this financing does show is that creditors see a future in the vehicle rental business. Indeed, the transportation industry, vehicle residual values, and rental demand have shown signs of life since the coronavirus initially swept over the nation. And Hertz is successfully executing its vehicle sell-off strategy that has taken its 532,000-unit fleet down to a projected 310,000 units by December 2020, a move that will help satisfy some debt and leave the company leaner upon emerging from bankruptcy.
Some factors remain undecided, and now the company has bought more time to negotiate with creditors. But shares of Hertz are still likely to end up worthless to common shareholders. The company may have a future, but it will likely be in a restructured form with new shares; that's one way creditors will get some value back for the financing they provided Hertz over the years.
So why did Hertz jump another 19% Monday? The answer could be that some novice investors are confused by the bankruptcy process, or that many investors are simply treating Hertz stock as something closer to gambling. Either way, long-term investors would be wise to watch these stock price swings from the sideline.