Hertz Global Holdings (HTZ +6.45%) stock is flying on Friday, up 14.1% through 1:30 p.m. ET, and for a most peculiar reason: Hertz is taking on a lot of debt, and at very high interest rates.
Of course, on the plus side, Hertz is also paying down a lot of debt. As the company announced this morning, it has just upsized a debt offering first announced yesterday, from $750 million to $1 billion.
NASDAQ: HTZ
Key Data Points
Why Hertz needs $1 billion
Hertz wants to pay down about half of its $2 billion bank revolving credit facility, you see. Problem is, it doesn't have a lot of cash lying around to do that with. Current cash reserves are below $500 million, and Hertz is furthermore free-cash-flow-negative, burning $1 billion a year. So it needs to float some bonds to raise the cash it wants.
Of the new debt offering, $750 million will take the form of first-lien senior secured notes due 2029, paying 12.6% interest. The remaining $250 million will be convertible debt -- exchangeable senior second-lien secured PIK notes due 2029 -- that pay 8% unless and until converted into Hertz stock.
Is this good news or bad news for Hertz?
Investors like the idea of Hertz not having to pay $1 billion for five years. They probably also like the idea that Hertz will use its new $1 billion to get rid of debt that's coming due sooner.
But here's the thing: S&P Global Market Intelligence shows the company owing about $17.8 billion in total debt at present, which cost the company $847 million in interest over the last 12 months. That works out to an interest rate of perhaps 4.8% on average that the company is paying on its debt. If the company is paying 8% to 12.6% interest rates on the debt it takes out to pay off this debt, though, the logical result will be Hertz paying more interest, and earning less money going forward.
I'm not so sure this news is good for Hertz.
