How Carl Icahn's Hertz Car Rental Got Dented

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(Bloomberg Opinion) -- Forget cruise ships, for a sector that’s really suffering in the pandemic look no further than car-rental operators such as Hertz Global Holdings Inc.

On Tuesday, the Florida-based company reached last-minute forbearance and waiver agreements with its debt holders to buy it time to deal with a liquidity crunch. Hertz now has until May 22 to sort out a problem that arose last month, when it stopped making payments on some of the cars it leases from a special purpose vehicle. Bloomberg News had reported that Hertz was preparing to file for bankruptcy protection unless creditors cut it some slack.

Like most car-rental companies Hertz is massively dependent on air travel. It gets about two-thirds of its revenue from airports. With the Covid-19 travel restrictions, its sales have plunged and it’s burning though cash. Furthermore, its huge vehicle fleet is exposed to a decline in the value of used cars. Second-hand prices have tumbled because millions of consumers have lost their jobs and rental firms have a big surplus of vehicles they need to shift. Doing that is difficult when car auctions are closed and social-distancing measures are in force.

While the whole industry is in a tight spot, Hertz is particularly vulnerable because it has too much debt and too small a cash buffer. Billionaire Carl Icahn’s big bet on car rentals — he first bought Hertz shares in 2014 following an accounting scandal and now owns 39% of the company — is deeply underwater. The shares have fallen 82% this year.

This week Paris-based Europcar Mobility Group persuaded the French state to guarantee a 220 million-euro ($239 million) rescue loan, even though it too carries a lot of debt. In contrast, Europcar’s big American rivals, Hertz, Avis Budget Group Inc. and Enterprise Holdings Inc. failed to persuade the U.S. Treasury to help them, as my fellow columnist Brian Chappatta noted recently.

This might seem unfair: The airlines shared $50 billion in taxpayer largess and not all were worthy recipients, but politicians don’t see car rental as equally important. Plus, there’s the small issue of who owns them. Privately-held Enterprise belongs to the billionaire Taylor family, and Avis’s largest shareholder is a hedge fund, SRS Investment Management. As for Hertz, Icahn is worth almost $18 billion, according to the Bloomberg Billionaires Index. None could be described as needy. 

When outlining cost-cutting measures last month, Hertz Chief Executive Officer Kathryn Marinello said it was a “resilient company.” But in financial terms, it has lacked a firm foundation. The company has $19 billion of debt and lease obligations, according to Bloomberg data, or about 4.4 times last year’s Ebitda. Cash and other liquidity was just $1.4 billion at the end of December.

That’s a thin buffer considering Hertz’s vulnerability to sudden shifts in demand and car prices. Many of its vehicles are financed by asset-backed lending. If the value of those assets declines, lenders can force it to post more collateral. Unlike in Europe, most of its U.S. fleet can’t be returned to the manufacturer if it becomes surplus. 

And because almost all of its assets have been borrowed against, or are otherwise encumbered, unsecured creditors risk steep losses in Chapter 11 proceedings. The $500 million of senior unsecured 6.25% coupon bonds, maturing in 2022, trade at less than 20 cents on the dollar. 

In fairness, most of Hertz’s problems preceded Marinello’s tenure and she’s tried to put the business on a firmer footing. It raised $750 million from Icahn and other shareholders last year. Hertz’s borrowings have been a problem ever since Ford Motor Co. sold its former subsidiary to private equity in 2005.    

A $2.6 billion deal to acquire low-cost rival Dollar Thrifty in 2010 didn’t pay off, and Hertz’s sedan-heavy fleet was badly positioned when tastes shifted to sports-utility vehicles. Later, ride-hailing companies such as Uber Technologies Inc. emerged as alternatives to rentals. Hertz leases cars to ride-hailing firms, but it has struggled to generate cash because of heavy spending on its vehicle fleet. Competition is intense despite the industry’s increasingly oligopolistic structure. Hertz has made a loss in four or the last six years.

Icahn upped his stake in March but his apparent reluctance to throw more good money after bad is understandable. Rental firms hope some nervous public transport users will rent cars until the pandemic wanes, but airlines are warning that flight demand could remain negligible until the end of this year. The outlook is grim. 

Enterprise has shown that it’s possible to run a rental company without leveraging it to the gills — its debt is still rated A- by Standard & Poors, albeit with a negative outlook. Hertz shows what can happen when you drive away a bigger car than you can afford.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

©2020 Bloomberg L.P.

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