Hertz Corp: Restructuring Underway

We hear from Reuters on April 23, 2020, in an exclusive, that Hertz is in financial trouble because of Covid-19 and has hired restructuring advisers. All this from the ever reliable “people familiar with the matter”. The publicly traded car rental conglomerate has $17bn in debt, and the burden – given the market conditions – is “unsustainable. The stock price of Hertz has dropped from above $20 as of February 20 to $3.5, close to its low. We believe a bankruptcy filing is possible.

You might imagine that there would be no BDC exposure to a company as huge as Hertz, but the sector is very far from its roots lending to small companies with little access to the capital markets as the Congress first envisaged in 1980. The BDC involved here is Barings BDC (BBDC), which has $5.8mn in Hertz Corp’s 2023 Term Loan which is priced at just LIBOR + 275 bps. When this position was first booked in the IIIQ 2018, the idea was to invest in the safest companies in the leveraged debt markets. Like in the Great Recession what seemed as safe as houses in the expansion does not when the tide goes out.

At 12/31/2019 BBDC valued the investment at a slight premium to par. Now the loan trades at a (30%) discount, according to Advantage Data which tracks prices constantly. This could yet go lower. Moody’s is projecting the company could run out of cash by the end of the second quarter. That’s only 8 weeks away…We are leapfrogging the Hertz Corporate Credit Rating from CCR 2, which is “performing” to CCR 4, where we expect the odds of an eventual loss are greater than that of full recovery. We are also adding Hertz to the Weakest Links list of companies likely to drastically restructure or file Chapter 11 – essentially the same thing.

This is not a major exposure for BBDC and the income involved is modest thanks to the borrower favorable pricing but this story is a useful early reminder that a great deal of companies thought to be unimpeachably reliable sources of interest income may not be. If Hertz is making its way down this slippery hill, who is next ?