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It's Not Looking Good For Hertz [Updated]

Illustration for article titled Its Not Looking Good For Hertz [Updated]
Photo: Hertz

The rental-car industry is in shock right now after months of zero demand and virtually no business. Talks between Hertz and its creditors don’t seem to be going anywhere, leaving the company staring bankruptcy in the face.

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Saturday, March 23, 2020 12:35 p.m: Hertz filed for Chapter 11 Bankruptcy late Friday night

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Late last month, Hertz announced that, in the wake of the global pandemic and quarantine, it had missed substantial lease payments on its cars—which the company doesn’t buy outright at the point of purchase. At the time, the company claimed it was seeking leniency from creditors but reports indicated it was already considering its bankruptcy options.

And now it seems those considerations may be fruitless. Automotive News reports that Hertz is now stuck in a deadlock with a key group of its creditors tied directly to its fleet of vehicles:

The deadlock between the car-rental company and creditors, including holders of asset-backed securities tied to fleets of vehicles, comes as some investors have grown more confident they’ll be made whole if Hertz files for bankruptcy and is forced to sell the cars backing their bonds, the people said.

Hertz has until Friday to either extend a forbearance agreement or make around $400 million of lease payments. If no deal can be reached, Hertz may need to seek court protection in the coming days, according to the people. Top shareholder Carl Icahn could still swoop in with a last-minute rescue to protect a $1.6 billion investment, now worth about $170 million as of Thursday’s close, one of the people said.

The problem for Hertz now, though, is that the used car market has also tanked, so used car prices are lower and the company won’t get as much money if it’s forced to sell off its fleet. In the U.S., Hertz operates over 567,000 vehicles, and over 200,000 more in its international fleet.

Dumping hundreds of thousands of used rental cars into a used market already struggling its own right could likely lead to a collapse, as we’ve discussed before.

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The company has already offered up its fleet of Chevy Corvette Z06 models (if you’re lucky enough to be looking for a good deal right now), but given the state of arrangements with creditors, it looks like a lot more will be in the yard sale shortly.

Reviews Editor, Jalopnik

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DISCUSSION

Warning: This is going to be lengthy. If you don’t care to hear why the US economy is on the edge of an actual depression don’t read this.

Hertz is attempting to fight forces that are much more powerful than just the pandemic. There are very few investors who see any value in Hertz beyond their intellectual property and customer data. Even Carl Icahn will still make money when Hertz goes under.

All of the leases for Hertz’s fleet have been bundled and fed into the securitization machine. They were mixed in with other corporate lease portfolios and sold off to investors as Asset-Backed Securities (ABS).

If this sounds eerily familiar it’s because this is EXACTLY what Wall Street does with mortgages. Investors bought ABS portfolios because they usually provide steady interest income and have tax benefits as well.

But when say, a global pandemic occurs and a large portion of the US economy is shut down the asset-backed securities related to troubled industries like rental vehicle leases and student loans become toxic. I mentioned student loans for a reason. I’ll come back to it later.

The flip side of this is smart investors always hedge their bets on ABS with other investments that will increase in value if the economy has issues. They can also “buy” complex financial products like derivatives that act kind of like insurance for those investments in ABS. And that is why most investors that know their business are actively betting the global economy gets much, much worse.

Wall Street has bet massively against Hertz’s leases, auto loans, mortgage loans, credit card debt and private student loans. There is now more student loan debt in this country that credit card debt. We have 35,000,000 people unemployed right now. (That figure is definitely not accurate and going to grow) All loan default rates are starting to move in the wrong direction right now. Businesses are not paying their equipment leases, office leases/mortgages and consumers are starting to miss payments on everything. This is all terrible for you and I but for those investors who bought “insurance” on America’s debt they only get paid when the defaults occur.

The worse the downturn the more money they make. There is a reason why the markets are up. The do not reflect the actual economic conditions. They reflect the fact that some companies are going to thrive in this environment.

Anyone who was intimately involved with the triggers of the great recession are terrified right now. Some of the same mechanisms that doomed us in 08 are happening again. This time it’s not the financial firms that are being revealed as overleveraged dumpster fires. It’s every company that didn’t build a nice rainy day fund for the inevitable. Some didn’t because they wanted to boost their stock prices (as well as executive bonuses) and some could not because they were hemorrhaging money just staying open. Looking at you brick & mortar retail not named TargetWalmartGroceryStore.

Now as everyone says the tide is going out and we are going to see who has been swimming naked. The feds are holding the capital markets together right now by buying everything: stocks, bonds, ABS and most importantly commercial paper. Commercial paper are the overnight loans that giant companies use to fund operations. As soon as this downturn started the commercial paper market froze again. Banks were afraid to lend to companies because who knows if they’ll even survive overnight.

I’ve said all this not to sound smart in the comments. I’ve said all this because if you don’t follow financial markets and get all of your info from the mass media you don’t actually know just how fragile this economy is right now. The media cannot be seen as incititing panic.

I don’t care what your political affiliation is or what industry you work in. I just want you to be aware that if the government and the finance markets don’t step up in the next month or so we are going to be in deep trouble. All of those 35 million jobs are not coming back. The economy is not going to “take off like a rocket”. Please prepare yourselves for some insane months ahead. The canary in the coal mine for this one are the upcoming corporate bankruptcies. We already have Pier 1, J. Crew, JC Penney,  Neiman Marcus and a bunch in the energy sector. There will be many more in the weeks ahead. Student loans and auto loans are a huge concern for me right now. Unemployed folks don’t make car payments and college graduates with no income can’t make student loan payments. The loans are backed by the government but investors will still take a haircut. This nation runs on credit. If credit drys up because the fed can’t or won’t keep pumping liquidity into the system we are screwed. Our political leaders are idiots and they are going to screw this up. I’m not referring to only the President. Congress must work together to provide huge amounts of liquidity (aka cash) into the system because if everyone stops spending we are done.

This isn’t really the forum for this long ass rant but I’m already seeing cracks in the dam. I don’t want the federal deficit to increase like it did in 08-09 but in this case we do not have a choice. I am just 1000% sure that this time they are going to be far too cautious and delayed. And not because Trump is President. The Dems and Repubs are both responsible for the government’s response. If you don’t agree with me that is perfectly fine and I really, really want you to be right. I am sitting here with a MAGA hat on and pom poms routing for the President, Steve Mnuchin and Congress.