Typically, when a company offers stock to the public, it emphasizes the positive. Fundamentally, the pitch is this: Buy us and prosper. Maybe even get rich.
But Hertz Global Holdings put out a prospectus this week that projected a different outcome: Gamble on us and be prepared to end up with something worthless.
Hertz, you see, is bankrupt. But it said it hoped to sell $500 million in shares, maybe even $1 billion, anyway. For sheer audacity, what Hertz was trying just takes my breath away.
It caught the eye of the Securities and Exchange Commission, too. On Wednesday, Jay Clayton, the agency’s chairman, said on CNBC, “We have let the company know that we have comments on their disclosure,” and added, “In most cases, when you let a company know that the S.E.C. has comments on their disclosure, they do not go forward until those comments are resolved.”
Trading in the company’s shares stopped briefly at 11:44 a.m. and in a new filing, Hertz said it had suspended its new stock offering, while it discussed matters with the S.E.C.
The S.E.C. declined to expand on Mr. Clayton’s statement, and Hertz did not respond to repeated requests for comment.
What is unusual in the Hertz stock venture is that the company is still in the early stages of what are formally known as Chapter 11 bankruptcy proceedings. Companies in bankruptcy do not, as a rule, sell stock, precisely because creditors have a higher claim on assets than shareholders do. By the time the creditors have been paid a fraction of what they are owed, there may be nothing left for shareholders.
Still, a federal bankruptcy judge in Delaware gave Hertz permission on Friday to sell up to $1 billion in stock, and on Monday, its prospectus said it intended to sell $500 million worth.
Issuing additional shares of stock while the bankruptcy process is still underway is a fabulous idea, if you hold the company’s bonds, said Michael Cazayoux, who has analyzed Hertz’s bonds for KDP Investment Advisors.
“The money that the new shareholders pay may go right to the bondholders,” he said. That’s one reason he has given Hertz bonds a “buy” rating. They have been trading for around 40 cents on the dollar but may be worth more than 50 cents — thanks, in part, to the money that may flow in from new shareholders.
On the face of it, though, if the new stock sale were permitted, it would be a very bad deal for shareholders. “That’s why, normally, this just doesn’t happen,” he said.
But there is always a first attempt, and this may well be it.
I asked Lynn E. Turner, a former S.E.C. chief accountant, whether a stock offering like this, by a company in the early days of bankruptcy, has ever occurred before. “I can’t recall an incident where a company has made a stock filing this early after filing for bankruptcy,” he said.
Hertz, to its credit, disclosed the risks to prospective stock shareholders quite openly. If it is permitted to proceed with the sale, buyers won’t be able to say they weren’t warned.
The prospectus says clearly that on May 22, the giant car rental company entered bankruptcy proceedings because it could not pay all of its debts. As a consequence, there is a “significant risk” that by the time the company’s lenders are through with it, all of its stock — not just the shares in the potential new offering — will turn out to be “worthless.”
In fact, it uses the word “worthless” seven times, like a series of hazard lights set up along a long and dangerous road, so even unwary, inexperienced or perversely oblivious drivers will see at least one of them.
Here is a representative sample. It appears in boldface, much like this, so you can’t miss it:
“We are in the process of a reorganization under chapter 11 of title 11, or Chapter 11, of the United States Code, or Bankruptcy Code, which has caused and may continue to cause our common stock to decrease in value, or may render our common stock worthless.”
Hertz appears to have sought to comply with legal requirements while availing itself of what it described in a court filing as a “unique opportunity” to raise money cheaply by selling new shares, while day-traders on Robinhood and other platforms play with its existing stock as though it were a video game.
The details are singular, but the recent trading frenzy — bidding up shares despite clear warnings that they have little or no intrinsic value — is reminiscent of previous episodes of what the economist Robert J. Shiller calls “irrational exuberance.”
Barbara Roper, director of investor protection for the Consumer Federation of America, said, “What immediately came to mind for me were the stock disclosures you used to see for I.P.O.s during the dot-com bubble in the middle of 1990s, where the companies explained in vivid detail that they had no prospects for ever making a profit — and people bought those stocks like hot cakes.”
In some respects, she said, the Hertz gambit reminds her of the initial public offering of one of the dot-com era’s most spectacular flameouts, Pets.com. In a prospectus for its February 2000 offering, it said, “We believe that we will continue to incur operating and net losses for the next four years, and possibly longer, and that the rate at which we will incur these losses will increase significantly from current levels.”
The company made a cultural mark — its television commercials, featuring a raucous sock puppet, were, for a time, ubiquitous — but the prospectus was wrong about one thing. It didn’t manage to lose money for four years. By November 2000, it folded, and its existing shareholders lost their money. Unlike Hertz, though, it went bankrupt quietly and didn’t try to sell additional stock while in bankruptcy.
The dot-com bubble didn’t end well for anyone but short-sellers, who were betting on the bubble’s demise. By October 2002, the Nasdaq, in which many of the dot-com stocks were concentrated, lost more than 75 percent of its value.
Of course, the current era is different. The stock market’s volatility — and many of Hertz’s problems — are, to a large extent, caused by the coronavirus pandemic, and may well be relieved if and when the pandemic recedes decisively.
And Hertz, which celebrated its 100th birthday in 2018, is no Pets.com. It has survived many market cycles and in many incarnations. It is even possible, Mr. Cazayoux said, that with some big “ifs,” the next chapter in Hertz’s story will be a happy one. If it is able to sell the stock, and if the economy recovers quickly, it is conceivable that Hertz can “cure” its bankruptcy quickly, and the stock will be worth something, after all. “It’s extremely risky, certainly,” he said.
For extreme risk takers, a new offering of stock from a bankrupt company could conceivably have some value, said Jay R. Ritter, a finance professor at the University of Florida. Mr. Ritter said he teaches that a stock is “an option on the future value of a firm.” If that future value is somewhere between zero and, say, $2 billion, the stock might be “worth something as long as there’s a possibility” that the company will end up being worth something.
But that’s a gamble, in my estimation, not an investment. It sure isn’t something I would count on. As Ms. Roper put it: “What Hertz is doing raises serious concerns for investors.”
But, like Pets.com, Hertz is creating a wonderful spectacle. While social distancing, enjoy bankruptcy from the sidelines.
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June 18, 2020 at 05:00AM
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Hertz: And Now for Something Completely Worthless - The New York Times
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