Hertz, the car rental firm, files for bankruptcy in the USA

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 of vehicles.

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.