Hertz Falls as Analyst Says Revoked Bond Deal Risks Default

(Bloomberg) -- Hertz Global Holdings Inc. shares plunged after an analyst report suggested the troubled rental-car company may have risked defaulting on its debt by canceling plans to redeem bonds in July.

The stock fell as much as 11 percent after Xtract Research analyst Valerie Potenza wrote in a report that Hertz’s reneged plan to refinance as much as $450 million in bonds may have violated covenants. The move could constitute a default on debt maturing in 2019 because the company told investors it planned to redeem those notes, she wrote. Karen Drake, a Hertz spokeswoman, declined to comment.

If bondholders press the issue and demand payment early, it would be a blow to a Chief Executive Kathryn Marinello, who’s been trying to stem deep losses and slim down a bloated vehicle fleet. Marinello, 61, has been selling passenger cars at depressed prices and buying larger sport utility vehicles that she thinks consumers would prefer to rent. The company has stockpiled cash to keep her fix-it plan moving.

“For the moment they have enough cash, but if one group of bondholders accelerate you would expect the others to follow behind them,” Potenza said in a phone interview. If 2019 bondholders demand payment sooner, holders of the other seven series of Hertz unsecured debt could also demand payment, she said.

Rescinding the debt refinancing was controversial. Hertz sold $1.25 billion in second lien notes in May. The company said at the time that it would use the proceeds to redeem some 2018 and 2019 debt. On July 28, after the market closed, Hertz said without detailed explanation that it wouldn’t go forward with the redemption of the 2019 issues.

Revoked Notice

Hertz’s 2019 notes do not say that a redemption notice can be revoked, Potenza said in the report. The company’s failure to revoke the debt therefore could be viewed by some bondholders as missing a principal payment, she wrote.

Holders of the 2019 bonds are due two more coupon payments, which could keep them from demanding payment now, Potenza said. They may be better served waiting before claiming a default, so long as they believe Hertz is good for the money, she said.

The cost to insure against a default by Hertz over the next year surged Friday to the highest since 2009. Credit-default swaps maturing in June 2018 climbed more than 400 basis points to as much as 821 basis points, according to data provider CMA. That level, which means it would cost the equivalent of $821,000 to insure $10 million of Hertz bonds, was up from 379 basis points Thursday.

Hertz shares fell 7.1 percent to $17.37 as of 3:48 p.m. in New York trading. The stock has lost about two thirds of its value over the last year.