Florida-based car rental company Hertz (OTCMKTS:HTZGQ) has had the worst year possible. It was one of the first notable companies to file for bankruptcy after the novel coronavirus pandemic sent demand plummeting. Moreover, Hertz stock was also delisted from the New York Stock Exchange back in October. It’s now looking to mount a recovery in 2021 with its debtor-in-possession arrangement and additional funds it has borrowed to replace its fleet.
Additionally, it is also looking to sell off its fleet management division for a handsome $875 million. However, all these efforts are incredibly risky and simply an eye-wash for investors hoping for a resurgence next year.
Hertz is banking heavily on economic recovery in 2021. Vehicle utilization rates in the U.S. and around the world sharply declined this year. The company would be looking at a rate in the high 70’s, but at this point, it’s unclear as to how things will pan out next year.
Returning to pre-pandemic levels within 12 months seems a bit far-fetched. Therefore, Hertz’s elaborate plan for its revival isn’t believable at this point.
No-Risk for DIP Creditors
Hertz operates in a highly capital-intensive sector, and in remaining competitive, it is imperative for it to continually invest in its business. The company announced that it would be replacing its fleet with newer vehicles under its DIP arrangement. The company will borrow $4 billion from private equity company Apollo Global Management (NYSE:APO). It will be using the proceeds to buy the new vehicles, rented to it under a master lease.
Previously, if the company failed in abiding by the terms of the master lease, the resulting claims were classified as unsecured. Therefore, they were far down the list of recoveries. However, in the current scenario, the claims arising from the master lease will be classified as a super-priority.
Therefore, the DIP lenders carry significantly low risk in the bankruptcy scenario. Another core aspect of the deal is the $1 billion equity investment by Hertz under its new financing structure. It will be using the cash to put into its vehicle deal, and in case it runs into any financial troubles, its equity investment will be under the scanner. Hertz will have $5 billion in total to purchase 229,000 new vehicles. That comes to roughly $21,800 for each vehicle, which suggests that it would be purchasing primarily economy type vehicles.
Outlook for 2021
Hertz’s fleet replacement plan is extremely risky and highly dependent upon its performance next year. However, it is tough to gauge how quickly the economy will bounce back to pre-pandemic levels at this stage. Specifically, how the vehicle utilization rate will improve is also a concern. Hertz’s third-quarter results show that the vehicle utilization rate was 52% compared to 79% in the same quarter last year.
Hertz is hopeful that its utilization rate will be at 79% next year. This seems implausible at this stage, considering how Covid 19 is still rampant across the world. You’d expect growth in the first half of the year to remain sluggish, but things should pick up in the second half. However, the 79% figure still seems a bit too much at this stage.
On a side note, Hertz recently announced it would be selling assets of its fleet management arm, Doblen Corporation, to Athene Holding (NYSE:ATH). The final amount of the transaction is estimated at $875 million to $900 million. The proceeds will be used to pay off $1.3 billion of secured lien debt, which usually has the highest priority in the Chapter 11 reorganization plan.
Final Word on Hertz Stock
Hertz is pushing the narrative that its reorganization plan will ensure its recovery coupled with an economic recovery in 2021. The problem is that there are too many variables with its elaborate plans, all of which seem unlikely to pan out at this point. It won’t be getting any leeway from its creditors, and its plan needs to; otherwise, it could be curtains for the company. Therefore, it’s best to look away from Hertz stock at this stage.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.