The secret of the firm: bankrupt company Hertz

Car rental company value rises amid auction war erupted during restructuring


Maybe the team of Robinhood knows something. Pundits discovered last summer when Hertz's publicly traded stock, which had already filed for bankruptcy, increased to $800 million as a result of purchases by social media-active retail traders.


The bonds of the company were then sold for almost nothing, and everyone assumed that Hertz's reorganization would ruin investors.


Ten months later, the car rental company's portfolio has become one of the hedge fund master's most successful investments. Last week, Hertz was truly auctioned out under Chapter 11 of US bankruptcy law, reflecting the post-pandemic buzz around the US economy, and increased demand for risk resources.


At the beginning of March, Hertz approved the investment group's $4.8 billion bid. Then, after Thursday evening's last application, Hertz 'value, including net debt, significantly jumped to $6.2 billion.


Most interestingly, the latest plan calls for full payments of all creditors' debts in cash so that existing doomed shareholders can invest in the new Hertz business. Investment in distressed assets has been a struggle in recent years against vague legal papers, with stakeholders of little significance. However, the Hertz saga seems better: soft financiers need billions of dollars to invest in order to revive a promising enterprise.


At the beginning of the bankruptcy, low-rated Hertz bonds that traded at 10 cents are now 100 cents sold.


At a Delaware Bankruptcy Court virtual hearing on Friday, Attorney Tom Lauria asked how useful the hypothesis about market efficiency was: "I do not know if debt is proof of fair value? Securities are rising and falling. "


Lauria appeared in court on the turnaround proposal, which Hertz estimated at $5.5 trillion, led by three private equity companies, Centerbridge, Warburg Pincus and Dundon Capital.


The Troika committed to investing $2.6 billion in the new company to reimburse the key debt completely in cash. The low-rated bonds are to earn an interest in the new Hertz, priced at 75 cents.


Alternatives for investors

But bond investors did not agree with the figure of 75 cents. As debtor investors expect that the stakes they earn in the new Hertz business and the ability to purchase at a slight discount would increase the value of their shares considerably, Hertz bonds rose to over 100 cents. The Centerbridge strategy was designed to destroy the existing share capital, which was approximately $300 million.


Hertz shareholders also noted the price of the debt securities contract. If the last resort's debt has worth, then their equity can certainly not be sold for almost zero, they claim. A consortium of several funds, including Glenview Capital, Hein Park, and FourSixThree, formed a joint-stock committee earlier this month insisting that the Centerbridge proposal "disrupts any recovery artificially for current shareholders, depending on the most costly capital."


In other terms, the restructuring plan negotiated between the corporation and the bondholders was to match the existing Hertz equity value. In theory, the hedge fund party may have been right. But it doesn't matter, since they didn't make a single competitive offer.


That changed on Thursday night, however. Initially, in March, Hertz selected a $4.8 billion turnaround strategy led by two firms, Knighthead Capital and Certares. The tender community Centerbridge bid a higher amount.


Knighthead/Certares then made an offer worth $6.2 billion worth of Hertz and paid all existing debt holders equal to it. Some estimates show that businesses themselves spend $2 billion on financing the programme, with Apollo Global Management contributing up to $2.5 billion of preferred stock. In addition, this financial formula requires existing shareholders to purchase $750 million from the new share capital of Hertz. Hertz's stock soared 40% on Friday to $1.73, hoping to have potential value for investors.


The board of Hertz must now review the counter-proposal of Knighthead/Certares before it can circumvent the contentious Centerbridge contract. This battle could also postpone the exit of the corporation from Chapter 11 until the end of June. This does not surprise Robinhood's day traders in 2020, but Hertz is an unusual company that seems to increase its value as it remains in bankruptcy.


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