It didn’t even bother explaining why. Investors are left to their own devices to figure it out.
On Friday after markets had closed, at the end of July, when no one was paying attention, the beleaguered rental-car giant Hertz rescinded in an SEC filing a big-fat promise it had made on May 31. The promise was made to induce investors into shelling out $1.25 billion for a new issue of bonds.
Hertz had promised in a May 31 press release, as these senior second-lien secured notes were being priced, that it would use the proceeds from the sale of the bonds to buy back existing debt. This was important to bond buyers. As Hertz claimed, the notes were issued “as part of an overall plan to optimize the Company’s capital structure.”
“Optimizing the capital structure” — that’s good. Not adding more debt. This is what it promised in its press release at the time:
Hertz intends to use a portion of the net proceeds from the issuance of the Notes, together with available cash, to redeem in full all of its outstanding $250.0 million aggregate principal amount of 4.25% Senior Notes due 2018 (the “2018 Notes”) and $450.0 million aggregate principal amount of 6.75% Senior Notes due 2019 (the “2019 Notes”). Hertz intends to use the remaining net proceeds from the issuance of the Notes, together with available cash, to refinance certain of its other existing indebtedness in one or more transactions following the consummation of the Offering, which may include repayments of outstanding borrowings and/or commitment reductions with respect to its senior credit facilities and/or repurchases, redemptions or retirements of certain of its other senior notes.
And then late Friday, it rescinded the above promises, emphasized with a sentence in red all-caps:
The Notice below is rescinded in its entirety because the conditions precedent set forth in such notice will not be satisfied on or prior to the redemption date set forth in such notice.
Here’s the a screenshot of the ALL-CAPS sentence:
In other words, the promises it had made on May 31 were fake promises. Friday’s filing didn’t even bother explaining why. Investors are left to their own devices to figure out why.
Maybe Hertz is bleeding so much cash that it cannot afford to redeem the bonds, that it needs the money so it can bleed a little while longer before it runs out, and maybe it had known all along that it could not redeem those bonds but it couldn’t tell bondholders because the yield would have shot through the roof and the cost of issuing this debt would have ballooned…
Whatever investors thought, they didn’t like it. On Monday, Hertz shares plunged 21% to $13.67.
The whole thing with that stock is ironic. On May 8, Hertz had posted a horrific earnings report for the first quarter that blew past even the dismal consensus expectations, and shares plunged 18% that day to $12.25. They continued to plunge and finally hit $8.70 on June 21, based on the reality the company faces, as per its earnings report:
Revenue got hammered as expense account travelers and tourists are shifting their ground transportation dollars from rental cars to rideshare companies. Expenses got hit by declining used vehicle values that caused depreciation expense to jump. And the bottom line got hit by a net loss of $223 million. So Hertz is in a pickle.
Here’s the irony: after getting beaten down to $8.70 on June 21, the bottom-fishers jumped in with a vengeance, and shares doubled to $17.34 at the close on Friday — before the “RESCIND” debacle was disclosed. But those that didn’t get out on Friday gave up a big junk or all of their profits on Monday. And those that had jumped on the bandwagon late are now licking their wounds.
Over the past 11 months, Hertz shares have plunged 74% as of Monday’s close.
Bond investors didn’t like it either. The yield on Hertz’s 6.25% bonds maturing in 2022 jumped nearly a full percentage point from 8.21% on Friday to 9.13% on Monday, with the price dropping from 91.8 cents on the dollar to 88.25 cents on the dollar. But back on June 9, the price had dropped as low as 80 cents on the dollar with the yield spiking to 11.3%. Buying this stuff after it plunges is how hedge funds make their living. They just gotta get out in time.
A week from now, Hertz will try again with another earnings report. Expectations are once again so low it will be hard to miss. But like last time, Hertz might one again manage to blow past the expectations on the downside.
It’s OK for a company like Hertz to struggle with operational challenges. The world changes; and it’s not easy to stay on top of it. But for a company to whack its investors around in this opaque manner with loudly propagated fake promises to the tune of $1.25 billion that are then quietly rescinded just two months later on a Friday summer night – that speaks of desperate measures to deal with desperate problems.
Rideshare companies are changing the way business travelers look at ground transportation, and the collapse of business travel spending on taxis and rental cars is just stunning. Read… Uber, Lyft Mangle Rental Cars & Taxis. Other Sectors Next
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.