Rental Agencies in Dutch: Hertz Looks Into Restructuring

Hertz Global Holdings is reportedly bringing in economic advisors to help the business manage its mounting debt. Unsurprisingly, everyone in the world simultaneously canceling their vacation plans wasn’t great for business. Your author has had to cancel four trips this year, three of which would have included going from an airport to a rental agency. With others forced to do the same as the events and places they planned on enjoying closed up shop, the prognosis is not been good for the borrowed-automobile sector.

When we last checked in, rental agencies had slashed rates to an almost unimaginable degree. Realizing that cheap rentals actually earn you less money when you have a surplus of vehicles nobody wants, those prices have begun creeping back towards normal. But financial problems have not abated. Still, we can put a positive spin on this since you’re probably tired of hearing bad news. Instead of this signaling disaster for rental agencies, think of Hertz bringing in restructuring experts as a sign that it’s being proactive in coping with a truly undesirable situation.

Feel better? Alright, let’s bring you back to reality.

Hertz’s stock took a serious tumble in late February, falling from roughly $44 a share to just $12.72 in a month’s time. While a gentle rebound occurred immediately afterwards, the pandemic has kept the agency’s share price hovering around $20 for weeks. Combine that with having practically no customers and a glut of older vehicles it’ll have real trouble offloading (used car prices are a joke right now, and no one’s buying) in order to buy fresh ones, and things quickly become insurmountable.

There’s no way for rental agencies to contend with this, as their entire business model became useless overnight. In fact, you can see the stock of practically every firm, from Avis to Zipcar (technically the same company, I just needed the Z), slide disconcertingly downward near the end of February. For Hertz, this resulted in staffing reductions and consolidating locations to better serve regions where it might still see some action.

According to Bloomberg, the company is bringing on restructuring experts from Moelis & Company to help it boost liquidity and hopefully avoid filing for Chapter 11 bankruptcy. Based on its last financial report, Hertz currently had an estimated $1 billion in liquidity at the start of April.

From Bloomberg:

The squeeze calls into question Hertz’s ability to manage its nearly $500 million of annual corporate interest expenses, Joel Levington of Bloomberg Intelligence said in a note.

More pressure will come from weak used car prices, according to S&P Global Ratings. That’s a problem because Hertz regularly retires and sells off thousands of older cars from its fleet, and the proceeds are needed to reinvest in new vehicles.

Hertz’s loans and notes are trading at deeply distressed levels, with bonds maturing in 2024 falling to less than 30 cents on the dollar from around par as recently as last month. In credit markets, derivatives linked to the company are pricing in more than 95 percent odds of a default in the next three years.

“But we think it may be sooner than later — particularly since federal car-rental aid doesn’t appear to be forthcoming — to preserve liquidity and to help reorganize the company with a less-stressed balance sheet,” Levington wrote.

Unless something changes soon and rental agencies begin seeing an uptick in business, expect other companies to begin restructuring as well. Avis already expects May to mimic the 80-percent year-over-year decline in business witnessed in April. In March, it also committed to over $400 million in annualized cost removal and mitigation — saying the move would help it preserve liquidity. Avis has already shrank the size of its vehicle fleet by 20 percent and furloughed 21,000 members of its workforce. Meanwhile, Hertz put 10,000 people on a leave of absence this month. Both companies have instituted hiring freezes for the foreseeable future.

[Image: IJzendoorn/Shutterstock]