A quick analysis of the Hertz bankruptcy.
This isn’t our typical type of investment, nor am we holding (or advocating people to hold) Hertz.
However, with the recent publicity this way getting, I decided to take a quick look at it and see if there was any substance behind the rise in Hertz after bankruptcy. As I’m writing, HTZ is trading at $2.83, giving it a market cap of $403mm. I’m assuming that the bankruptcy continues and the following is a liquidation view of the stock. Under Chapter 11, the company hopes to continue its operations at a reduced scale. During proceedings, shareholders are last in line to receive anything from the bankruptcy, after secured and unsecured creditors.
There was $1 billion in cash
There was $2 billion in receivables.
There were $14 billion of cars which will be sold off.
There were $4bn in hard-to-liquidate assets – plants,property and equipment (PPE) as well as intangibles (ie the Hertz brand)
Liabilities that have to be paid off before shareholders get anything:
There’s $14 billion of secured debt used to purchase the cars (almost exactly the same as value of the actual cars)
There are continuing operating costs despite no revenue after the 10-Q due to the lockdown, and also costs throughout bankruptcy.
There are $4 billion of bonds, and let’s say $2 billion of other unsecured liabilities in the form of accounts payable, etc.
So now it’s a simple matter of adding up add the assets and liabilities to find the liquidation value of Hertz, and see if shareholders will end up with anything:
The book value of the cars Hertz owns/leases is the biggest asset they have. For now, I’m going to assume that they get the full sum, which completely pays off the secured debt. (We’ll come back to this later)
It’s difficult to judge what operating costs they’ve had, since they’ve cut operations at the same time as revenue dried up due to the pandemic. For the sake of simplicity, let’s say the costs this quarter cancel out the cash on hand completely, and the accounts payable cancel with the accounts receivable.
The costs of a Chapter 11 bankruptcy for a company this size are massive, and will likely cost the entirety of the $1bn capital raise – if it’s even successful.
So now, we have:
$4 billion of bonds that need to be paid off before the shareholder STARTS to get anything out of the company. This is backed up by the bond yields before the whole massive explosion started, where they yielded in a range from 20-25%.
The only place where this shortfall could come from is if Hertz has done a terrible job valuing its assets. Assuming that Hertz manage to liquidate the entirety of their hard-to-liquidate assets at book value (again, coming back to this later), it’ll pretty much cancel out the bonds. Now, you just need to find $400 million of assets before the shareholder turns a profit! Looking up and down the balance sheet, the only place this could possibly come from is if Hertz manage to sell their cars for more than book value. However, it’s likely any flood of used cars into the marketplace will depress prices significantly and make the $14 billion we assumed earlier unrealistic to achieve, much less be able to achieve more than that.
So essentially, if you didn’t understand any of that, anyone buying Hertz is betting on this: Hertz manages to sell off its cars, brand name and PPE for approx. 2% more than book value.
Even though that doesn’t sound like that much, a company being able to sell its assets off in a fire sale for more than what they originally valued those assets at has NEVER happened. Typically, companies are lucky if they even get 50 cents on the dollar for their liquidating assets, and can’t shift their hard-to liquidate assets.
In our opinion, Hertz has no way of being the first ever to break that trend. Who would buy the Hertz name for $3 billion? If the supply of used cars rises dramatically, why would car prices increase? Although we don’t like saying anything is impossible, Hertzs’ current shareholders not being wiped out is as close as it gets. Frankly in our opinion we wouldn’t touch Hertz with a ten-foot barge pole. We don’t recommend you take this as a short thesis either, as if you’d like to short there are far better opportunities out there with lower short interest.