The Hertz bankruptcy bonanza has slammed into reverse

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In happier days, Hertz was the rare company in bankruptcy that was still solvent at the end of the case. As a consequence, its shareholders instead of being wiped out got a package worth just over $1 billion upon the company’s exit from restructuring.

Except it turns out they should not have. This week, a federal judge said Hertz short-changed its then-bondholders in its 2020 Chapter 11 restructuring to the tune of $270mn of interest payments: shareholders in effect appropriated that sum from them.

Paying back that money now could not come at a worse time. Hertz’s overall market value has shrunk to just $800mn. Its private equity backers placed a big bet in buying tens of thousands of Teslas. But Hertz customers never warmed to the electric vehicles and the gambit led to massive maintenance and depreciation costs. Hertz’s ebitda loss for the first half of 2024 was more than $1bn. It carries operating debt of nearly $5bn. The irony is — with its last reorganisation under the spotlight — that another bankruptcy is now very much in play.

The court fight that was decided this week centred on complex bankruptcy law, regarding what interest creditors are owed in the rare instance that a restructuring does not require them to take a haircut to their principal. US bankruptcy law calls for “absolute priority” in which junior claimants cannot earn recoveries until everyone ranking higher gets 100 per cent of their obligations, including interest.

Hertz decided that its bondholders at the time were owed a rate less than the interest stated in their contract. The court disagreed, finding it was unfair for those bondholders to take a hit when equity holders ranking junior were getting some money back.

Hertz’s unsecured bonds trade at under 75 cents on the dollar. The company says liquidity remains healthy but operating losses are going to have to reverse soon. That the stock has fallen from $34 a share to under $3 tells the tale. Rental car companies, however, have tremendous operating leverage where even small improvements in efficiency can lead to disproportionate profits.

That feature had allowed Hertz to stage a remarkable rally in value amid the 2021 travel surge, leaving the windfall to be distributed in the original bankruptcy. But for now, where its securities are trading suggests that not only would shareholders be zeroed in another bankruptcy, junior bondholders would not get owed interest and would take a big hit to the face value of their debt. Hertz’s bankruptcy bonanza from last time round is truly a distant memory.

sujeet.indap@ft.com