Hertz's implosion might be self inflicted by creative overleveraging

[Laconian]

https://www.epsilontheory.com/the-hertz-story-isnt-what-you-think/

...

On June 30, 2016, Carl Icahn led a restructuring of "Old Hertz", where the Hertz Equipment Rental Corporation (HERC) was split off from the car rental operations (Hertz Global Holdings). Each became a separate publicly-traded company (Icahn with 39% equity stake in Hertz and a 15% stake in HERC), each installed an Icahn-controlled board (not "controlled" in a legal sense, but controlled sure enough), and each started taking on massive amounts of debt.

How much debt?

Well, HERC has about $2.1 billion in long-term debt, against an equity market cap of only $830 million (and that's more than twice what it was at the March lows). The equity position is what we might call a stub ... a small piece of the enterprise value of the overall corporation (debt + equity – cash). If you want to understand HERC as an equity investment, you better focus your analysis on that debt position and how the company can support that kind of leverage!

As for the debt levels at Hertz ... LOL.

Hertz has more than $19 billion in long-term debt, against a market cap that was (at its 2019 peak!) about $2.1 billion. Now there's a stub for you.

It's hard for me to adequately convey the playground that an insanely levered rental company – whether it rents cars or construction equipment – provides for a financialization genius like Carl Icahn. Between asset depreciation assumptions, cost of capital assumptions, and the ability to securitize or otherwise move assets off your balance sheet ... the accounting cookie jar that a rental company gives Icahn is otherworldly. Keep in mind, too, that in 2017 – more than a year after Icahn took control – Hertz was forced to report that management had "identified material weaknesses in our internal control over financial reporting."

And then this happened:

Per the 2019 10-k, Hertz paid Icahn-controlled companies $57 million in related party transactions last year, including property lease payments.
Per the 2019 10-k, Hertz pension plan obligations are now underfunded by $126 million.
Per the 2019 10-k, last year Hertz raised $750 million in new equity, $500 million in new debt maturing in 2026, and $900 million in new debt maturing in 2028. With those proceeds, Hertz redeemed $700 million of debt due in 2020, $500 million of debt due in 2021, and $900 million of Senior Second Priority Secured Notes.

[AutobahnSHO]

Yeah, lots of people and companies go bankrupt over-leveraging themselves....    Icahn is sly like a fox though!

[Morris Minor]

There are lots of Hertz's out there.
An unintended consequence of the 'rona shutdown is that it has compressed the normal occurrences of herd culling that occur as part of a market economy's normal operation, creative destruction. So instead of the business failures, and their disruptive consequences, being distributed across the calendar, they are all happening at once, as is the disruption and angst. If we get through the social upheaval, we'll do well.

[Laconian]

There are lots of Hertz's out there.
An unintended consequence of the 'rona shutdown is that it has compressed the normal occurrences of herd culling that occur as part of a market economy's normal operation, creative destruction. So instead of the business failures, and their disruptive consequences, being distributed across the calendar, they are all happening at once, as is the disruption and angst. If we get through the social upheaval, we'll do well.

That depends on whether the government bails out these reckless companies. Does Hertz hire lobbyists? American capitalism is all about enabling greedy psychopaths to hollow out our public and private institutions for shareholder value.

[SJ_GTI]

That depends on whether the government bails out these reckless companies. Does Hertz hire lobbyists?

Not enough apparently...

[Morris Minor]

Not very good ones. Putting on the black hat, I suppose I would have argued that Hertz deserves to feed at the trough because riding public transportation is now a 'rona death sentence. Everybody is going to want to rent cars.
As a lobbyist I'd have told Icahn to buy indulgences for his mistakes by donating to the necessary election campaigns. Regaining the moral high ground is just a question of $$$, ensuring that our overlords' careers are long and rewarding.

[Laconian]

They can rent cars elsewhere. Taxpayers shouldn't subsidize reckless risktaking. We already do; we shouldn't do more of it.

[MrH]

They can rent cars elsewhere. Taxpayers shouldn't subsidize reckless risktaking. We already do; we shouldn't do more of it.

Was it Hertz that was reckless, or the banks providing the debt to them?

[Laconian]

Was it Hertz that was reckless, or the banks providing the debt to them?

Why not both? But probably more Hertz for being manned by assholes, and the board for putting them there. But the point stands: screw the banks too, we shouldn't guarantee their bullshit investment.

[TBR]

Was it Hertz that was reckless, or the banks providing the debt to them?

Hmm... were you asking the same question in the same way in 2008?

[MrH]

Hmm... were you asking the same question in the same way in 2008?

Yeah, the housing meltdown certainly fell on the banks to a large degree.  Federal programs incentivizing risky lending threw even more fuel onto the fire.  The biggest failure was probably in the credit agencies having zero idea how to measure the risk of the securities being traded.  They pencil whipped investment-grade ratings onto absolute garbage.

Are you implying I blamed the people taking on terrible mortgages in the housing crisis, but not blaming Hertz here?

Both deserve to go bankrupt.  The banks should eat the cost of that bankruptcy in both situations. 

[TBR]

Yeah, the housing meltdown certainly fell on the banks to a large degree.  Federal programs incentivizing risky lending threw even more fuel onto the fire.  The biggest failure was probably in the credit agencies having zero idea how to measure the risk of the securities being traded.  They pencil whipped investment-grade ratings onto absolute garbage.

Are you implying I blamed the people taking on terrible mortgages in the housing crisis, but not blaming Hertz here?

Both deserve to go bankrupt.  The banks should eat the cost of that bankruptcy in both situations. 

There is a tendency for many with more conservative viewpoints to put too much of the blame for 2008 on homeowners versus banks. To be fair, I didn't really remember if you were one of them (because that was 12 years ago) so apologies for the incorrect assumption. And, to be even more fair, there is a tendency for many with more liberal viewpoints to much of the blame for 2008 on banks versus homeowners.

The reasonable take in most of these scenarios is that blame falls on pretty much all parties involved.

[Morris Minor]

There is a tendency for many with more conservative viewpoints to put too much of the blame for 2008 on homeowners versus banks. To be fair, I didn't really remember if you were one of them (because that was 12 years ago) so apologies for the incorrect assumption. And, to be even more fair, there is a tendency for many with more liberal viewpoints to much of the blame for 2008 on banks versus homeowners.

The reasonable take in most of these scenarios is that blame falls on pretty much all parties involved.

Borrowers dumb enough to take on liar loans they have zero chance of shouldering.
Lenders dumb enough to give liar loans to people who have zero chance of repaying.
Politicians dumb enough to create the whole web of perverse incentives that encouraged it.
Ourselves dumb enough to elect politicians that rise no higher than our own levels of bestial stupidity.

It's too easy to blame the banks.

[Laconian]

https://insight.kellogg.northwestern.edu/article/what-went-wrong-at-aig#:~:text=On%20September%2015%2C%202008%2C%20the,shortfall%20just%20three%20days%20earlier.

Banks bundled iffy mortgages with AAA debt and pretended they were AAA.
Investment banks credit default swaps against the bundles. The combined values of these options were many times greater than the collateral they backed.
Banks multiplied the hurt in 2008 by many times with their reckless use of leverage and willful fraud in misrepresenting the quality of the debt.

It's not even close. Home buyers and banks got greedy, but in terms of sheer number of dollars, the banks fucked up our economy so much more.

[FoMoJo]

Borrowers dumb enough to take on liar loans they have zero chance of shouldering.
Lenders dumb enough to give liar loans to people who have zero chance of repaying.
Politicians dumb enough to create the whole web of perverse incentives that encouraged it.
Ourselves dumb enough to elect politicians that rise no higher than our own levels of bestial stupidity.

It's too easy to blame the banks.

https://insight.kellogg.northwestern.edu/article/what-went-wrong-at-aig#:~:text=On%20September%2015%2C%202008%2C%20the,shortfall%20just%20three%20days%20earlier.

Banks bundled iffy mortgages with AAA debt and pretended they were AAA.
Investment banks credit default swaps against the bundles. The combined values of these options were many times greater than the collateral they backed.
Banks multiplied the hurt in 2008 by many times with their reckless use of leverage and willful fraud in misrepresenting the quality of the debt.

It's not even close. Home buyers and banks got greedy, but in terms of sheer number of dollars, the banks fucked up our economy so much more.

Unfettered greed at many levels, mainly investment banks.

The only puzzling bit is why those doing the security evaluations, Standard & Poor, et al, were not able to see the damage that all the junk buried in mortgage backed securities (derivatives) could do to the global economy.  They were either incompetent or in on it.

What is also puzzling is why they are still in business.

[SJ_GTI]

I read a story online today that Hertz is asking the bankruptcy judge to allow them to issue something like $1 billion in new stock which would help them pay their bills. The issue of course is that any stock issued would probably be worthless (outside of a miraculous recovery or a government bailout), so seems like a scam.

[Laconian]

Hertz tried to make a billion more dollars by selling worthless stock to gullible day traders, before finally collapsing into a bankruptcy black hole. They basically said it was a scam in their SEC filing. SEC put an end to that, and Hertz will now finally going to hell.

http://archive.is/TxJJY

Typically, when a company offers stock to the public, it emphasizes the positive. Fundamentally, the pitch is this: Buy us and prosper. Maybe even get rich.
But Hertz Global Holdings put out a prospectus this week that projected a different outcome: Gamble on us and be prepared to end up with something worthless.
Hertz, you see, is bankrupt. But it said it hoped to sell $500 million in shares, maybe even $1 billion, anyway. For sheer audacity, what Hertz was trying just takes my breath away.
It caught the eye of the Securities and Exchange Commission, too. On Wednesday, Jay Clayton, the agency's chairman, said on CNBC, "We have let the company know that we have comments on their disclosure," and added, "In most cases, when you let a company know that the S.E.C. has comments on their disclosure, they do not go forward until those comments are resolved."
Trading in the company's shares stopped briefly at 11:44 a.m. and in a new filing, Hertz said it had suspended its new stock offering, while it discussed matters with the S.E.C.

[Raza]

I wonder how much of a dent readily available Ubers and Lyfts put in the rental car industry. I would imagine mist visitors to cities would rather ride share than rent.

[MrH]

This is where RobinHood has totally failed.  They've given access to people too dumb to understand what bankruptcy means.

I wonder how much of a dent readily available Ubers and Lyfts put in the rental car industry. I would imagine mist visitors to cities would rather ride share than rent.

It's killed rental cars for business travel for me.  Uber and Lyft are fully integrated with SAP's Concur now, which is probably the most wildly used travel and expense tool.  if I fly into a city, it's so much easier to fetch Ubers and Lyfts, and it automatically attaches to my expense report with the receipts.  I can go out to dinner and have a few drinks no problem.  Don't need to worry about filling a gas tank or returning a car.  Much easier.

[Tave]

Rental cars have gotten incredibly cheap since the advent of online booking. Unless it's a business trip where you're just going airport—conference/hotel/office—airport, or a trip where you plan on staying in a city center and walking everywhere, ride shares make zero economic sense. The cost of a one way Uber from any major city airport to the city is often more than an entire-day's rental.

[AutobahnSHO]

Rental cars have gotten incredibly cheap since the advent of online booking. Unless it's a business trip where you're just going airport—conference/hotel/office—airport, or a trip where you plan on staying in a city center and walking everywhere, ride shares make zero economic sense. The cost of a one way Uber from any major city airport to the city is often more than an entire-day's rental.

But waiting at the rental counter to get the car, then having to: find a gas station close to the airport, turn in the car, catch a shuttle from the rental lot to the terminal is often a huge time waste.