[Developing Story] May 22, 2020 – The Hertz Corporation and 29 affiliated Debtors (NYSE: HTZ ; “Hertz” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-11218. The Debtors, operators of the Hertz, Dollar and Thrifty vehicle rental brands, are represented by Mark D. Collins of Layton & Finger, P.A. Further board-authorized engagements include (i) White & Case LLP as general bankruptcy counsel, (ii) FTI Consulting as financial advisors, (iii) Moelis & Co. as investment banker and (iv) Prime Clerk as claims agent.
The Debtors’ lead petition notes more than 100,000 creditors, estimated assets of $25.842bn and estimated liabilities of $24.355bn. The Debtors' 10-Q for the quarter ended March 31, 2020 (from which these A&L figures are taken) also notes "Total debt" of $18.8bn.
Documents filed with the Court list the Debtors’ five largest unsecured creditors as (i) Wells Fargo National Association (Trustee for $900.0mn 6.000% Senior Notes Due January 2028), (ii) Wells Fargo National Association (Trustee for $800.0mn 5.500% Senior Notes Due October 2024), (iii) Wells Fargo National Association (Trustee for $500.0mn 6.250% Senior Notes Due October 2022), (iv) Wells Fargo National Association (Trustee for $500.0mn 7.125% Senior Notes Due August 2026) and (v) Goldman Sachs Mortgage Co., as lender and administrative agent ($200.0mn ALOC Facility). All 50 of the Debtors' top 50 unsecured creditors have claims in excess of $2.0mn with 18 in excess of $5.0mn.
- Debtors fail to secure extensions of waivers from VFN Noteholders and Senior Lenders in advance of May 22nd Deadline
- COVID-19 dramatically reduces rental and used car sale revenue streams, sets off domino effect beginning with April 27th failure to make Operating Lease payments
- Debtors unable to secure U.S. Government assistance
- Debtors file with $24.355bn of total liabilities and $18.8bn of funded debt
- Debtors enter Chapter 11 with new President and CEO after sudden resignation of Kathryn Marinello
- Debtors enter Chapter 11 with $1.0bn of cash including $595.0mn recently drawn down under Senior Revolving Credit Facility
- All of Hertz's businesses globally remain open
In a press release announcing the filing, the Debtors advised that: "The impact of COVID-19 on travel demand was sudden and dramatic, causing an abrupt decline in the Company's revenue and future bookings. Hertz took immediate actions to prioritize the health and safety of employees and customers, eliminate all non-essential spending and preserve liquidity. However, uncertainty remains as to when revenue will return and when the used-car market will fully re-open for sales, which necessitated today's action. The financial reorganization will provide Hertz a path toward a more robust financial structure that best positions the Company for the future as it navigates what could be a prolonged travel and overall global economic recovery.
As of the filing date, the Company had more than $1 billion in cash on hand to support its ongoing operations. Depending upon the length of the COVID-19 induced crisis and its impact on revenue, the Company may seek access to additional cash, including through new borrowings, as the reorganization progresses.
The Company actively engaged with many of its largest creditors to temporarily reduce the required payments under the Company's vehicle operating lease. Although Hertz negotiated short-term relief with such creditors, it was unable to secure longer-term agreements. Additionally, the Company sought assistance from the U.S. government, but access to funding for the rental car industry did not become available.
All of Hertz's businesses globally, including its Hertz, Dollar, Thrifty, Firefly, Hertz Car Sales, and Donlen subsidiaries, are open and serving customers."
As to negotiations with stakeholders, the Debtors note in their lead Petition that they "have been actively negotiating with the VFN Noteholders and the Senior Lenders to extend the protections provided by the Forbearance Agreement and the Waiver Agreements but, to date, no agreement has been reached to extend the protections provided by the Forbearance Agreement or the Waiver Agreements or with respect to any alternative financing strategy or structure."
Recently appointed Hertz President and CEO Paul Stone commented "With the severity of the COVID-19 impact on our business, and the uncertainty of when travel and the economy will rebound, we need to take further steps to weather a potentially prolonged recovery. Today's action will protect the value of our business, allow us to continue our operations and serve our customers, and provide the time to put in place a new, stronger financial foundation to move successfully through this pandemic and to better position us for the future. Our loyal customers have made us one of the world's most iconic brands, and we look forward to serving them now and on their future journeys."
On May 16th, Kathryn V. Marinello, the Debtors' then President and Chief Executive Officer, abruptly resigned as an officer and board member and was replaced by Paul E. Stone, the Company’s Executive Vice President and Chief Retail Operations Officer North America.
On May 11th, the Debtors announced a net loss of $356.0mn for Q1 2020 citing the impact of the COVID-19 pandemic. They also announced that they had drawn down "$595 million from its Senior Revolving Credit Facility and ended the quarter with approximately $1.0 billion of liquidity, substantially in the form of unrestricted cash and cash equivalents." It is this recently acquired cash that the Debtors are now touting as providing them with liquidity to see them through the first stages of the Chapter 11 process. Given how difficult it is to take this sort of step without losing the confidence of key stakeholders (like these senior lenders), this draw down and other aspects of the Debtors' last minute pre-Petition maneuvering may explain the abrupt departure of CEO Kathryn Marinello just days later.
On the 11th, however, Ms Marinello was still employed and commented as to the Q1 results: “We started the year with positive momentum, extending the strong growth trajectory of the past three years, reflecting consistent increases in both price and volume, productivity improvements and best-in-class fleet management…Yet in just two months, the outbreak of the coronavirus created a major business disruption as global travel demand dropped to almost zero and the U.S. used-car market effectively shut down. We immediately shifted our business priorities to focus on employee and customer safety, expense mitigation and preserving liquidity.
While ensuring the safety of its people, the Company aggressively managed costs and liquidity by right-sizing its staffing and operations to reflect the current market realities, significantly reducing capital spending, canceling new fleet orders and disposing of excess fleet through multiple disposition channels before the shut down of the used-car market. The Company believes these actions will result in approximately $2.5 billion in annualized cost savings."
On May 4th, the Debtors entered into forbearances and limited waivers with certain of the Company’s corporate lenders and holders of the Company’s asset-backed vehicle debt. The forbearances and waivers, which became necessary as the Debtors' failure to make required payments under their main operating lease (see just below), gave Hertz through May 22, 2020 to to develop a "financing strategy and structure that better reflects the economic impact of the COVID-19 global pandemic and Hertz’ ongoing operating and financing requirements."
On April 27th, the Debtors did not make required payments under their Amended and Restated Master Motor Vehicle Operating Lease and Servicing Agreement Series 2013-G1 (the “Operating Lease”) pursuant to which Hertz leases vehicles used in its day-to-day United States rental car fleet operations from its special-purpose vehicle finance subsidiary. As then announced, unless the debtors were otherwise able to procure further waivers/forbearances, failure to make those payments by the end of a grace period on May 4, 2020, would result in "certain consequences." As became clear a week later, those "certain consequences" included potential cross defaults through the Debtors' $17.0bn of prepetition debt agreements.
Principal Shareholders (sourced from 2020 Proxy Statement, except GAMCO which is from lead Petition)
- Icahn Associates Holdings LLC: 38.9%
- Dimensional Fund Advisors LP: 8.40%
- Renaissance Technologies, LLC: 6.79%
- PAR Investment Partners, L.P.: 6.35%
- GAMCO Investors, Inc: Over 5%
- The Vanguard Group: 6.34%
- BlackRock, Inc.: 5.37%
- D.E. Shaw Galvanic Portfolios, LLC: 4.63%
About the Debtors
According to the Debtors: "The Hertz Corporation, a subsidiary of Hertz Global Holdings, Inc., operates the Hertz, Dollar and Thrifty vehicle rental brands throughout North America, Europe, the Caribbean, Latin America, Africa, the Middle East, Asia, Australia and New Zealand. The Hertz Corporation is one of the largest worldwide vehicle rental companies, and the Hertz brand is one of the most recognized globally. Product and service initiatives such as Hertz Gold Plus Rewards, Ultimate Choice, Carfirmations, Mobile Wi-Fi and unique vehicles offered through its specialty collections set Hertz apart from the competition. Additionally, The Hertz Corporation owns the vehicle leasing and fleet management leader Donlen Corporation, operates the Firefly vehicle rental brand and Hertz 24/7 car sharing business in international markets and sells vehicles through Hertz Car Sales."
Corporate Structure Chart (attached to Petition)
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