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Reorganization of car rental company Hertz sees shareholders losing all of their money
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Wall Street scores one against Main Street as specialized distressed lenders and other creditors stand to make billions from loans to Hertz while day traders led by the Reddit brigade stand to lose their shirts
There’s no doubt that Redditors have significant power – they can rally even the most obscure and struggling stocks, sending them to ridiculous heights, before they inevitably plummet back to earth.
But even the power of retail investors can’t fix a broken business model.
Even before the pandemic, the likes of Hertz and other car rental companies were under pressure from the car sharing apps like Turo that enabled people to turn their underutilized cars into cash generating assets by renting them out – a model similar to Airbnb (-3.32%).
So, when day traders sent the bankrupt Hertz soaring by almost 900%, Hertz made hay while the sun shone, recognizing that the brief window to capitalize on its stock rally was short.
However, it’s not possible to breathe life into the dead (except maybe Jesus, but even then), and yesterday, a reorganization plan to end Hertz once and for all, after a 9-month journey through bankruptcy protection, will see shareholders of the once great car rental company get zero cents in the dollar – for shares that were as recently as three months ago trading around US$2.50.
Once again, Wall Street wins as creditors of Hertz, which include some of Wall Street’s biggest names in distressed lending, will be paid a hundred cents in the dollar after collecting millions in fees and interest payments for financing the company’s reorganization.
Even Hertz’s unsecured bondholders will have the option to take a cash payout of 70% of the face value of their bonds, or roll their debt into new financing. The list of potential winners in the Hertz reorganization reads like a who’s who in the specialized world of bankruptcy debt investors, who snap up bonds and debt at pennies on the dollar and push for a higher recovery in court.
But equity investors who paid as much as US$5.53 a share for Hertz, after the company filed for bankruptcy, will be completely wiped out – a reminder of the dangers and limits of Reddit-led charges into bankrupt companies. Yet it’s not as if investors weren’t warned.
Even as Hertz tried to sell more stock last year, it warned investors that the shares would likely end up worthless, despite managing to unload some 13.9 million shares for around US$28 million.
Hertz had filed for bankruptcy protection last May, as the coronavirus pandemic forced the near shutdown of the global travel industry.
For shareholders, the complete loss of their investment into Hertz should serve as a stark reminder of the risks involved with following the investment advice of nameless, faceless and leaderless investing hordes derived from internet messaging boards.
