(Bloomberg) — It was seen as one of the great markers of out-of-control, irrational froth during the pandemic — legions of amateur day traders were frantically snapping up shares of Hertz Global Holdings Inc. after it filed for bankruptcy.
As the stock swelled to $5.50 last June, it made no sense to the experts. Regulators stepped in, blocking the car rental company from selling any new shares to gullible investors.
On Wednesday, Hertz will exit bankruptcy. And when it does, the stock may debut at more than double that price — somewhere around $14, analysts reckon — just months after the company warned those stockholders that their shares were probably worthless.
The 103-year-old company’s turnaround neatly mirrors the trajectory of the economy as a whole: A violent collapse followed by a spectacular resurgence, aided by a boom in travel as virus cases plunged and by billions in fresh cash from some of the biggest investment houses.
Thomas Lauria, the lawyer who helped lead Hertz into and out of bankruptcy, knows that the chatter among the Wall Street cognoscenti is that he and his team were just lucky to have the deal go as well as it did, that it was simply the result of this confluence of extraordinary events. It isn’t so, Lauria said in an interview last week.
“Luck is something that happens when preparation meets opportunity,” Lauria said, quoting the ancient Roman proverb. The restructuring team stabilized Hertz’s business, putting it in position to capitalize on whatever came along, he said. “We started paddling like hell so that when the wave came, we were in a position to catch it, and we did.”
Ebb tide came on May 26, 2020, just after the start of the Hertz bankruptcy case, when the shares changed hands for as little as 40 cents. By the second week of June, investors were paying $5.53, and Hertz was saying it might wipe them out in the coming financial overhaul.
Warrant Windfall
Instead, the bankruptcy plan that emerged calls for stockholders to get cash and new stock initially valued at about $8 in total, and it’s possibly higher by now. They’re also getting warrants that entitle investors to buy more shares for the next 30 years at a strike price of $13.80 apiece, a potential windfall if the stock breaches that level.
Assuming a volatility of 45% for the new warrants, and using an $8.85 price for the current shares, this implies Hertz’s new stock may trade around the warrants’ strike price of $13.80, according to Phil Brendel, a distressed debt analyst with Bloomberg Intelligence.
The recovery stems in part from Hertz’s status as operator of one of the world’s biggest fleets of vehicles — about 500,000 as of a year ago — and thus one of the biggest sellers in the used-car market.
As the pandemic’s grip on the economy tightened, so did the supply of new vehicles, driving up the price of used cars 26% between April and August of 2020. Later, a global semiconductor shortage hurt new car production.
The result: Hertz could ask top dollar for surplus vehicles, and the proceeds helped pay down more debt than anyone originally imagined. By early this year, Hertz’s prospects looked a lot rosier, and some of Wall Street’s most aggressive investment firms that deal with troubled companies started paying attention.
Then, while they were crunching the numbers, came the biggest game-changing financial development of all: People began making summer vacation plans.
“What really struck a chord with me was when I started to feel a burning desire to travel,” said Andrew Glenn, who represented shareholders in the Hertz bankruptcy. “We’re all accustomed to working remotely, but we’re all prisoners of our own environment in need of an escape.”
On one side was Knighthead Capital Management and Certares Management, which teamed up with Apollo Global Management Inc. On the other was a consortium led by Centerbridge Partners, Dundon Capital Partners and Warburg Pincus.
Sweeter Offers
Each group submitted multiple rounds of offers to buy the bankrupt company, dangling sweeteners like full recoveries for debt holders and some cash or warrants for shareholders. The competition increased the value of the company and payout to both groups, a concept nearly unthinkable when the pandemic shutdowns sent Hertz’s revenue to near zero.
On May 10 of this year, the competing parties convened at Lauria’s White & Case law offices in Miami for a formal auction. They worked around the clock from 10 a.m. on Monday until Tuesday night. Some participants didn’t have the chance to check into their hotel rooms.
“We just kept feeding people to keep the competition going,” Lauria recalls. “There was a momentum and energy around the process that would be lost if we sent everyone home.”
Knighthead and Certares came out on top with a plan valuing Hertz at around $7.4 billion including debt that made bondholders whole and gave stockholders their recovery package. It’s an astounding outcome not just for the high value the equity holders received, but because it’s so rare for them to get anything at all in a bankruptcy.
Certares is planning investments to improve Hertz’s technology and customer experience, Greg O’Hara, founder and senior managing director at Certares, said in a statement. Certares has “unique data and insights” from its other travel investments that it can use to assist the car renter’s management team going forward, he said.
Hertz has been “an important player in traditional mobility for decades and is being positioned as a key player in the next generation of mobility,” Knighthead co-founder Tom Wagner added.
Fast Movers
“What’s remarkable was not the first seven months of the Hertz case but the last three months — how fast this happened,” Glenn said.
So now the company is leaving court oversight just as a surge in summer road trips begins. The July 4 holiday will be the second-busiest on record, with 47.7 million Americans expected to travel, according to the AAA automobile club.
Hertz’s newest problems may include a shortage of cars to rebuild its fleet, but meanwhile it’s raking in the revenue. Renting a small SUV from Hertz for the long weekend at the airports for the top three destinations on AAA’s list — Orlando, Florida, Denver and Anaheim, California — would cost between $530 and $1,030, far more than a typical monthly lease payment.
Lauria, for his part, will be celebrating the occasion with a vacation to Greece that sidesteps the rental car shortage. He’s going island hopping — no Hertz car needed.
(Updates with comments from Certares and Knighthead in paragraphs 20 and 21.)
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