Hertz Corp. : Files Chapter 11

On May 22, 2020 Hertz Corp filed for Chapter 11. The BDC Credit Reporter had anticipated as much in our earlier – and first – article about the car rental giant on April 24, 2020. Apparently, despite much back and forth with lenders, the company will be entering bankruptcy without a pre-agreed restructuring deal so the future remains uncertain. Furthermore, some payment relief is being negotiated with asset-based lenders, but that’s not yet resolved. Any number of outcomes remain possible with the travel industry still in a state of high uncertainty. (We avoided saying “unprecedented”).

There is only one BDC with exposure, as discussed in our earliest post: Barings BDC (BBDC). We cannot assess if the (30%) fair market discount taken at 3/31/2020 will be sufficient or whether a further loss – and then a realized loss – will be coming. Certainly, chances are the $0.2mn of annual investment income will be suspended until a final resolution emerges. Given the size of BBDC the impact both in NAV and income terms will not be material.

However, the Hertz story is notable for other reasons. First, this is one of the most high profile BDC-financed companies to file for bankruptcy protection since Covid-19 came along and is undoubtedly a victim of the virus impact. At year end 2019 BBDC and all other lenders valued the debt of Hertz at par or better. The length of time from the initial impact of the virus on business activity has been short – less than 3 months.

Also – as the Hertz press release ruefully mentions – the multitude of programs offered by the Treasury and Federal Reserve to help Covid-19 affected companies failed to do so in this instance. As far as safety nets go there appear to be big holes through which many companies may yet fall.

Finally, to those who claim the government should do nothing to help in these troubled times because bankruptcy is an almost painless transition from one set of owners to another with little other consequence, we note that Hertz will be “reducing planned fleet levels through vehicle sales and by canceling fleet orders“, which will reverberate for years to come across the automotive industry. Also, Hertz will be “deferring capital expenditures and cutting marketing spend” which will hurt a myriad associated businesses.

Most important of all, for a government with the stated goal of minimizing the impact of Covid-19 on employment, Hertz will be “implementing furloughs and layoffs of 20,000 employees, or approximately 50% of its global workforce“. The moral hazard here is not government propping up troubled companies but the fact that the governmental lifeboat is – seemingly randomly – picking up some of those in the water and some not. But we digress.