It Hertz To Go Bankrupt
Hertz, the third largest car rental company in the US, may be going through the most outrageous bankruptcy we’ve ever seen. Here’s a look at Hertz’s crazy year:
- May: Hertz goes bankrupt, stock falls 80%
- June: Investors bet against a Hertz bankruptcy, stock rises over 500%, just to fall over 75% over the next 3 weeks.
- June: Hertz attempts to sell “worthless” stock to investors — shut down by the SEC.
Here we go again… The latest news in the Hertz saga: On Oct. 16, Hertz’s stock more than doubles on the news that it could receive a $1.65b loan to help it get through bankruptcy — pending court approval.
The Airbnb for car rentals
There are two big problems with car rental businesses — It takes a lot of capital to own and manage a large fleet and cars depreciate in value very quickly. This makes car rental businesses a highly unprofitable and difficult business to run.
Hertz’s problems go beyond that… For years, the company has struggled with internal operations, loaded itself with over $19b in debt and failed to keep up with its competitors.
Hertz lost market share to other rental competitors — Avis, ride hailing services, and other startups looking to disrupt the car rental industry — think Airbnb meets car rental (e.g. Turo, Getaround).
COVID shutdowns had a big impact on car rental companies, which generates nearly 2/3 of their sales from airport rentals. The lack of travel forced Hertz to file for Chapter 11 bankruptcy.
For investors… Is Hertz worth it or worthless?
Investors are still buying up Hertz shares despite the company going through bankruptcy — but do they really understand what they’re buying?
In the majority of Chapter 11 bankruptcy filings, the stock of a company becomes worthless. Here are the two scenarios that usually plays out in a bankruptcy:
- Scenario 1 (most likely)… Old shares are cancelled (value goes to zero) and new shares are issued to the debt lenders after restructuring.
- Scenario 2 (least likely)… Existing stockholders will be distributed a portion of the newly issued shares.
In scenario 1, you’ll lose all your money as a stockholder. In scenario 2, you’ll likely lose the majority of your money. Any value left in the company after restructuring will go to its debt lenders first. If stockholders are lucky, they might get a piece of the new company —but don’t count on it.