The Hertz bankruptcy has lurched through court since the car rental company declared Chapter 11 in May, but it hopes to buy some time to get its house in order by filing a proposed settlement with its lenders late Monday involving a one time $650 million payment under a new vehicle lease contract.
Hertz currently has just under 500,000 vehicle leases on its books. The company was originally eager to cancel the leases and cull its fleet, but, of course, lenders were not quite as anxious to lose money. Bloomberg has more:
Under the accord, Hertz will for the rest of the year halt its effort to cancel some of the nearly 500,000 leases on the cars the company rents out to consumers. A separate Hertz entity owns the vehicles, which the company leases back under a contract that gives lenders strong collateral rights.
Hertz will likely pay less that it would normally owe the lenders, who the company blamed in part for pushing it into bankruptcy in May. Under the vehicle lease contract, Hertz must not only pay regular rent for each car, but also a fee to cover depreciation as the fleet ages and loses value over time.
“It seems like this is a minimum payment for depreciation of vehicles in the fleet,” said Philip Brendel, a senior distressed-debt analyst with Bloomberg Intelligence.
The company will ask U.S. Bankruptcy Judge Mary Walrath to approve the settlement at a court hearing scheduled for July 24. It filed its proposed resolution in Wilmington, Delaware just before midnight on Monday. A representative of Hertz did not return an email requesting comment.
When it first filed for bankruptcy it owed $400 million in bills from April it could not pay, with $135 million just in vehicle depreciation alone. Earlier this month Hertz tried to shed 144,000 vehicles from its books which would have saved the company over $80 million a month, but lenders balked, wanting Hertz to sell the excess fleet gradually to ensure the best price. Now that used car prices have rebounded, lenders might be more willing to play ball.
Hertz’s business model was effectively wiped out when the COVID-19 epidemic grounded planes across the country. Way fewer travelers meant way fewer car rentals. The company that holds Hertz’s leases has two options. From Bloomberg again:
The cars are housed in an entity linked to Hertz’s asset-backed securities and leased to the rental giant. Normally, when a company with ABS files for bankruptcy, it must choose to confirm or reject the entire master lease tied to the debt. If it keeps the lease, it has to continue making payments on the vehicles as it offloads them piecemeal. If it walks away, all of the collateral is liquidated to pay back bondholders. Hertz had sought to selectively reject leases for around 30% of the vehicles governed by the master lease.
This $650 million solution is also just a temporary one. Should there be no permanent agreement with lenders by January of 2021, then Hertz will go back to the drawing board. The company will go before a U.S. bankruptcy judge on July 24 to ask for the plan to be approved.