Hertz Bankruptcy: What Happened & What It Means for the Future

Shah Gilani

Three weeks ago, on a Friday, Hertz Corp. (NYSE: HTZ) declared bankruptcy. The reasons? Not hard to see: There was a radical, COVID-19-driven demand collapse for travel and car rentals, coming at a time when the company had about $24 billion in debt against around a billion bucks in cash on hand. There was a string of lackluster CEOs, as well, who pocketed millions in payouts even as they plotted to lay off more than 30,000 employees.

As a trade, if you've got a big appetite for risk, there could be some possibilities with HTZ shares, but as a "buy" proposition, this is a not a stock anyone should touch with a borrowed 10-foot pole. It's radioactive... and yet, over the past few weeks, investors, perhaps sensing a bargain of some kind, chased it from $0.56 all the way up to a high of $5.53 (hit on June 8) - more than 887%!

And did I mention Hertz is bankrupt? It's a walking dead. A zombie, pure and simple.

Now, sometimes speculators can make money moving in and out of zombie stocks, but it's very dicey, and someone has to lose out. Usually, the investors who lose are the ones who believe they've got a bargain. The New York Stock Exchange served Hertz with a delisting notice, which the company is appealing, but until something decisive happens, speculators will do what speculators do.

But these are very unusual times, and a very unusual - very dangerous - idea was being floated that would have slaughtered folks who are searching for some kind of value that HTZ simply doesn't have. It could still fundamentally alter the way American businesses enter and exit bankruptcy...

A Cynical Proposal, Even for Wall Street

What usually happens in a Chapter 11 bankruptcy is this: Creditors try to salvage what the company owes them by exchanging their debt for new stock. As a practical matter, that means taking control of a company... and wiping out existing shareholders.

And to be clear, unless by some miracle creditors get back what they're owed, those shareholders get nothing.

However, in the sign of these unusual, irrationally exuberant times, investment bank Jeffries Group figured retail investors wanted Hertz stock so much they'd be willing to buy another $500 million or $1 billion worth of it. They even agreed to underwrite the new stock offering.

Hertz ultimately backed off, under pressure from the Securities and Exchange Commission, from what would have been nothing less than a watershed event.

See, if Jefferies would have been able to sell $500 million of old Hertz stock to new buyers, the company would probably have raised enough money to help it emerge from bankruptcy without going down the usual road that's lined with broke shareholders.

Of course, since it's in bankruptcy, Hertz ran this idea past the presiding bankruptcy judge. To pretty much no one's surprise, the judge approved Hertz's request.

Like I said, ultimately the SEC put the brakes on this cynical, dangerous play. And it's a good thing, too...

It would have been open season on investors who seem at the moment to not be able to get enough HTZ.

While Hertz and Jeffries won't be the first to try, there's pretty much nothing stopping some other distressed company - take your pick - from trying again. And, times being what they are, the SEC might not be able or willing to quash it next time.

Retail investors would get stuck holding a very worthless and empty bag. And it would change the future of bankruptcy finance.

At that point, investors would be forking over good money for the privilege of being unwitting test subjects in a bizarre, risky - and (did I mention?) - cynical experiment.

Yes, it's crazy and irrational, but, with the markets being what they are and sentiment being what it is, it might work, particularly if a "buy the dip" mentality prevails.

And if it works, there's nothing to stop other distressed companies from trying to take a similar route, flooding the markets with more and more questionable, quasi-worthless stock.

Here's What to Do Now

So Hertz and Jeffries can't swing it... but the "next time" is out there, maybe just around the corner. What Hertz and Jeffries proposed would be bad for the markets, bad for regular investors, even bad for capitalism itself.

Under no circumstances should anyone buy into such a scheme.

Instead, continue to follow durable, promising trends we research, like the growth of 5G, angel investing, and cannabis - not financial sleight-of-hand.

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