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No one likes to pay extra at the rental car counter. But that is the situation facing Knighthead Capital and Certares, the private equity duo who invested $2bn to buy Hertz out of bankruptcy in 2021. That seemed like a canny trade: within a few months of closing the deal, the investors were up $3bn.
Since then Hertz has taken a wrong turn. An expensive bet on electric vehicles has flopped. The financial cost has been enormous, leaving the company facing a liquidity crisis.
Hertz on Thursday announced plans to raise $750mn from issuing new bonds, a portion of which Knighthead and Certares have committed to buy in an attempt to salvage their existing equity stake. Rental car companies have enormous operating and financial leverage where small changes have big financial consequences. Hertz’s equity value has slipped to just $900mn but even a modest turnaround could send the share price zooming.
In a two-step financing, Hertz is first selling $500mn of “first lien” secured bonds. It is separately offering $250mn in “exchangeable senior second-lien secured PIK notes”. Knighthead, Certares and another unnamed investor have committed to buy these latter bonds which will not pay cash interest and can be swapped into Hertz stock if it rallies.
Hertz already carries $4bn in corporate debt, plus another $10bn in asset-backed bonds that fund its rental fleet. It had acquired 100,000 Teslas after its private equity takeover. But slower customer adoption followed by costs from vehicle damage and weak re-sale prices have hammered profitability. In the first quarter, Hertz recorded an earnings before interest, taxes, depreciation and amortisation loss of more than $500mn.
Hertz says that it has a plan to cut costs to help boost ebitda by $500mn annually. This fresh cash will simply buy some breathing room to let the recovery play out. The problem for equity investors is that the new capital raising is so large and costly, that it will soak up much of any subsequent value creation. Existing Hertz bonds have been trading below 70 cents on the dollar.
When Hertz first went bankrupt in 2020 at the outset of the pandemic, it could not raise the cash needed to repay margin calls from its vehicle lenders. Later, it became obvious that a savvy financier should have provided rescue financing that would have pre-empted a costly bankruptcy. Knighthead and Certares are trying to prove this time that Hertz’s woes are about liquidity, not solvency.