Hertz wasn’t the first bankruptcy victim of the coronavirus pandemic, and it doesn’t look like it will be the last.
But the Lee County-based rental car giant has pulled off what could be a first of another kind: getting a bankruptcy court judge to approve its unusual request to raise at least $500 million in cash through a new stock offering. Bankrupt companies rarely go to the stock market for capital because bondholders and creditors are required to be paid before shareholders under bankruptcy laws. And the pot is almost always empty by the time shareholders get to the front of the line, making the stock worthless.
But Hertz officials, in a June 12 bankruptcy court document, say the company is trying to take advantage of a recent rally in its shares — another oddity. After the May 23 bankruptcy filing, those shares sat at $0.56 cents a share May 26 and less than a dollar June 8. But by June 12, after a wild week in the markets, the stock, traded on the NYSE under HTZ, were worth more than $5 a share at one point before dropping a bit. (Shares had fallen to $2.29 by midday June 15.)
While the bankruptcy court approved the capital raise, the Securities and Exchange Commission, in a June 17 report, expressed doubts about the idea. Later that day Hertz, in a regulatory filing, said it was suspending the capital sale pending the SEC's review.
Hertz, in its motion to the bankruptcy court, says raising capital through stock sales would be less restrictive than the typical way of obtaining financing while in bankruptcy. That way, called debtor-in-possession financing, usually comes from traditional bank loans and provides working capital to cover operations and bankruptcy litigation costs.
The company also acknowledges the atypical nature of its request, saying an “investment in Hertz's common stock entails significant risks, including the risk that the common stock could ultimately be worthless.”
Multiple Wall Street analysts and bloggers noted the move, and the bankruptcy court’s approval, with incredulity.
A headline on a June 12 story in the Zero Hedge blog, for example, read “The Most Absurd Moment in the History of Capital Markets: Hertz Plans to Sell Up To $1 billion in New Stock.”
Seeking Alpha and ValueWalk equities analyst and blogger Dilantha De Silva, meanwhile, wrote that it’s “revolutionary to even think about raising capital from equity markets after filing for Chapter 11 as it's no secret that most of these companies eventually cancel existing common shares in their reorganization plans.”
Others took to Twitter to comment on the move.
One called it “absolutely insane,” while another wrote “I have to say that I have never seen a debtor petition the court for permission to sell equity to idiots, er, investors....WHILE IN BANKRUPTCY.”
And this one sums up the offering nicely: “Plenty of worthless paper has been sold before, but never with such honest intent. This offering, if pulled off, is absolutely legendary.”