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Hertz's possibly worthless stock soars in risky recovery bet
[ESTERO] Hertz Global Holdings shares are rallying two weeks after the company filed for bankruptcy in an extreme example of the bets investors are making on recovery from the coronavirus pandemic.
The car renter's stock traded as high as US$3.70 shortly after the start of regular trading Friday, a 353 per cent surge from Wednesday's close. The two-day boost is in part a reflection of signs that air travel is poised to rebound.
Hertz also is likely to benefit from prices of used cars at auctions coming all the way back from a mid-April collapse. Market researcher JD Power said Thursday that prices last week were above its pre-virus forecast.
Those positives aside, Hertz's equity holders are still taking on significant risk. Shareholders rarely recover anything from companies that have filed for Chapter 11 because under US Bankruptcy Code, all of a company's debts must be repaid in full before stockholders recover anything.
The recovery in used-car prices is "a major narrative shift from just a few weeks ago", Adam Jonas, an auto analyst at Morgan Stanley, said in a report. Holders of Hertz's asset-backed securities, which are backed by the value of its vehicles, now stand a greater chance of being made whole.
Investors also are asking about the independent value of Donlen, Hertz's fleet-management unit, and the value of its European business, Mr Jonas said. Still, his base case is that while the equity may stay liquid enough to trade as a distressed stock, a full recapitalisation is unlikely.
There is still "a real risk that shareholders may not be able to recoup any proceeds" from the bankruptcy, Mr Jonas wrote.
Hamzah Mazari, a Jefferies analyst, also said in an email that while there may be some sort of resolution for equity holders this month, it is unlikely. The options market suggests there is a 90 per cent chance the stock trades back to US$0.50 or below, he wrote.
Billionaire investor Carl Icahn was Hertz's biggest shareholder when the Estero, Florida-based company sought court protection on May 22. He sold all of his 55.3 million shares on May 26 at a loss of almost US$1.6 billion.