Measuring Bankruptcies in Hertz
Hertz, one of the largest car rental companies, has missed the rental payments on its cars.
The Hertz fleet is part-owned, part-leased. In downtimes, it sells owned cars to meet the obligations on leased ones, but used car auctions have gone soft amid coronavirus, and now the firm has only one place to turn; bankruptcy!
This legacy business has been crushed under the weight of debt accrued long before coronavirus. It’s used borrowed money to buy out rental rivals and broken investors’ trust with fines for number fudging. Modern ride-hailing apps compounded the suffering, and coronavirus dealt the killer blow. RIP!
The winner from this bankruptcy is Apollo Global, a private equity firm that saw it coming. The Invstr community has backed Apollo with over $72 million in invested capital and is 91% bullish as the stock rebounds.
The firm’s been purchasing insurance contracts, credit default swaps, for Hertz’s mountain of debt. All of a sudden, insurance on the debt has become very, very valuable indeed. The trade has paid off. It looks like a 3,500% gain from where we’re standing!
Hertz will need to fire sale half a million used cars to meet its liabilities. It can’t sell them all at once, or car prices will tank, so it will have to sell around 30,000 cars each month. We’re still waiting on court approval for the official plan, but debtors are entitled to first dibs on whatever cash is raised. It’s hard to see how the stock is worth anything.
In case you wondered, other notable bankruptcies from coronavirus include JC Penney, Avianca, Virgin Australia, True Religion, Comcar Industries, Gold’s Gym, and Stage Stores. It could be worse (and it is for smaller companies), but all these legacy businesses were already trending on the wrong way with big leverage and piles of debt. Who’s next?
