The coronavirus pandemic has wreaked havoc for the economy, and several rental businesses are staring at bankruptcy, and the latest victim is Hertz, the famous car rental company. The 102 years old company has filed for bankruptcy protection after its business went down over the past few months due to the coronavirus pandemic.
In a US court filing on Friday, Hertz
admitted that the act of filing Chapter 11 reorganization was completely
voluntary. The US proceedings stated only about the operations in that country
and did not include its services in other countries like Australia, New
Zealand, and Europe. The government
orders restricting travel has dealt a severe blow to Carl Icahn, the
billionaire investor who has the largest shareholding of the firm. As airports
remain under closure with the internal travel ban, a significant portion of
Hertz’s revenue, which comes from airport car rentals, has dried up.
Undone by pandemic
Until the end of 2019, Hertz had
about 38,000 employees worldwide and a total debt of around $19 billion, which
makes it one of the largest companies hit by the coronavirus pandemic. Hertz,
the Florida-based company, which operates the car rental business under the
name Dollar and Thrifty, had skipped significant car lease payments in April.
It was compelled to hold talks with creditors for setting up waiver and forbearance
agreements on the missed payments, which were set to expire on May 22.
US airlines would have met similar
fates had they not received millions of dollars in government aid, an option
explored by Hertz but to no avail.
Increased obligations, more problems
To compound the problems, Hertz’s
lease obligations have gone up considerably due to the decline in the value of
vehicles due to the pandemic. A person familiar with the company moves said
that Hertz has proposed to the creditors with asset-backed securities who
finance its fleet of vehicles that it would be selling more than 30,000 cars
every month until the end of the year raise about $5 billion.
The complexity of Hertz’s balance
sheet that shows more than $14 billion securitized debt is making things
worse. Hertz uses the proceeds from the
securities to finance new vehicle purchases, which are then leased out to Hertz
in exchange for monthly payments, which have gone up due to the falling value
Also, Hertz has traditional loans,
credit lines, and bonds with conditions that can trigger default from missing
those payments or failing to meet the conditions such as reimbursing borrowed
funds and delivering an operating budget on time.
Signs of downsizing
Hertz had earlier retrenched 10,000
employees and expressed doubt about its ability to continue as a growing
concern. On May 16, Kathryn Marinello, CEO, made way for new incumbent Paul
Stone who was board executive.
Hertz can avoid bankruptcy with support from creditors and financial aid that it has sought from the US government. As part of the government’s unprecedented financial relief package of $2.3 trillion, the US treasury has started assisting companies, and we must wait to see the results.