An insight into a big company facing financial difficulties by Ulvi Hagverdi.
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The Hertz Corporation, based in Estero, Florida, is the second-largest US car rental company, which also operates in 150 countries worldwide. Heart announced that it had missed lease payments on 30th April 2020 and was on the verge of bankruptcy. The company failed to attract sufficient funds from investors and its CEO Marinello resigned subsequently.
The halt of global tourism, the shrinking global economy and rising unemployment rates fuelled Hertz’s decay. The failure to agree on mutual terms with lenders was the last straw and the company declared bankruptcy on May 22nd, 2020 after nearly $19 billion of debt. Hertz had secured its loans by its fleet of cars, and the decreasing value of its cars consequently weakened its ability to be granted with higher loans.
The most interesting part of this story is when Heart declared that it is looking forward to raise up to $1 billion in new equity, meaning that new hot stocks will be issued in value of $1 billion. The rationale behind this decision was to raising cash to help it through the bankruptcy process. This announcement led to Hertz’s share price skyrocketing from 59 cents to $5.50 a share – one of the most unprecedented trends in the stock market in 2020.
Retail investors, that are individual investors possessing shares of a given security, are known for having a limited capacity to impact the value of a share price of massive corporations traded in New York Stock Exchange. Nevertheless, retail investors, particularly from ‘Robinhood’ trading platform, played a crucial role in Hertz’s share prices rising dramatically.
However, regulators immediately raised questions as Hertz mentioned that the shares might potentially be worthless. Initially, following $500m share sell, the judge in Delaware Court approved the stock sale, allegedly with the aim of protecting the creditors. Eventually, The Securities and Exchange Committee analysed the matter and Hertz announced that it will terminate its share sell after a detailed consideration.
It is estimated that airport rentals generate nearly two-thirds of Hertz’s revenue and the company’s effective operation seems unrealistic as the travel industry is expected to be restricted for a long period. However, it needs to be noted that a bankruptcy filing will not force Hertz out of its business immediately. Historically, there are some instances, such as General Motors and some airline companies, having filed a bankruptcy and recording notable profits after their recovery. It can be argued that the economic impact of Covid-19 will have a final say in the company’s future.
Written by Ulvi Hagverdi and edited by Stephanos Christodoulou.
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