Hertz Is On A Mission To Transfer Wealth From Shareholders To Debtors

Beat Billions has warned readers on multiple occasions to steer clear of the troubled car rental company, Hertz Global Inc. (HTZ). Hertz stock has continued to make wild moves in the market and shares rose sharply from the lows of around 50 cents to over $5 in just a couple of weeks, only to decline by a staggering 50% over the course of a few trading sessions. The significant increase in the share price is one of the most irrational market moves in our recent memory. Bankrupt Hertz, however, is trying to capitalize on this irrational market behavior and the company is on a mission to transfer wealth from common shareholders to its debtors. In its latest move, Hertz is seeking court approval to issue new shares totaling $1 billion. A hearing is scheduled for today, June 12. Regardless of the outcome of this hearing, Hertz will only continue to hurt investors in the future.

This is what Hertz wrote in its request letter to the court

Investors need not look beyond what Hertz wrote in its request letter to the court on June 11. The below excerpt from this letter should be self-explanatory.

Unlike typical debtor-in-possession financing, the common stock issuance would not impose restrictive covenants on the Debtors and would not impair any of the creditors of the Debtors. Moreover, the stock issuance would carry no repayment obligations and the Debtors would not pay any interest or fees to those who provide the funding by buying shares at the market. Hertz would include disclosure in any prospectus used to offer common stock highlighting that an investment in Hertz’s common stock entails significant risks, including the risk that the common stock could ultimately be worthless.

When a company enters bankruptcy protection, it is usual to seek debtor-in-possession financing, which is a commonly used source of funding to cover operating expenses until a reorganization plan is submitted to the SEC.

Hertz is coming up with a unique option to seek financing by issuing up to 246.77 million shares at an aggregate offering price that would not exceed $1 billion. In other words, Hertz is planning to sell new shares into the market at a maximum price of around $4.05 and Jefferies will act as the facilitator of this transaction if the company receives the approval of the bankruptcy court.

The company is blatantly claiming that there are no obligations arising from this sale of shares as Hertz would not be liable to pay interest or repay any amounts to shareholders, which goes on to indicate the absolute priority of the company, which is to satisfy its debtors at the expense of shareholders. We are genuinely surprised and shocked to see investors still betting on a company that is continuing to tilt the odds in favor of debtors, not shareholders.

This won’t end well for investors

If Hertz is given the approval, the company would make history by becoming the first company ever to capitalize on the irrationality of U.S. investors even after filing for bankruptcy. Both new and existing shareholders are likely to suffer a permanent loss in invested capital as the company will most probably cancel out its common shares once the reorganization plan is submitted to the SEC, which could be a few months or even a year away from now.

If the court rejects this request today (June 12), Hertz stock is likely to shed most of its recent gains as investors will realize the fact that Hertz does not have adequate funding to even survive the interim term.

Either way, shareholders are destined to lose money with Hertz. It’s no secret that Hertz stock is one of the most popular ones among Robinhood traders who are quite new to investing. In fact, some of the traders that we talked with were quite oblivious to the fact that Hertz has filed for bankruptcy and told us that their decision to invest in the company was based on some sort of a breakout pattern they have noticed on a candlestick chart! That’s the level of irrationality we are talking about when it comes to investors who are betting on the recovery of Hertz.

To sum it up, we believe Hertz will soon file a reorganization plan in which the company will cancel existing common shares and issue new shares to debtors. This will wipe every dollar invested in Hertz stock for good. Even in the unlikely scenario that Hertz will stage a recovery, we believe the likes of Uber Technologies Inc. (UBER) and Lyft, Inc. (LYFT) will soon push Hertz to bankruptcy one again. Hertz stock is one to avoid.

Beat Billions

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