Hertz car-rental location in San Francisco. (David Paul Morris/Bloomberg)
key takeaways:
- Hertz fell 41% on June 24 after the car rental company warned of earnings pressure and planned new debt.
- The company plans to issue $300 million in convertible PIK notes and $100 million in shares to help note buyers short the stock.
- Hertz said it would use the note proceeds to repay debt as used car weakness pushes second-quarter adjusted EBITDA toward $80 million or less.
Hertz Global Holdings’ stock fell the most since its initial public offering five years ago, after the car rental giant warned of pressure on earnings and plans to issue new debt.
The company is taking an unusual approach to issuing debt, servicing $100 million of shares that are designed to be shorted along with a $300 million offering of convertible payment-in-kind (PIK) notes.
Hertz said on June 24 that the shares would be offered to purchasers of the convertible notes for the purpose of selling the stock short and hedging their investments. regulatory filing In statements issued ahead of the offering, the company warned that this quarter’s profit was trending towards the bottom of its expectations.
The flurry of announcements sent Hertz shares plunging 41%, the company’s biggest decline since its 2021 listing.
“It’s a signal that they see the need to take some drastic action,” said Mark Hackett, chief market strategist at Nationwide. “This has been a delicate story for some time, and today it may signal the surrender of those who were holding it.”
Convertible bond buyers often buy shares along with the notes to protect their positions. But in the case of Hertz, there is limited availability of stock to borrow and sell short. The company is issuing more shares because most of its existing stock is concentrated in the hands of institutional and private equity investors, and its shares are already heavily shorted.
The shares will be borrowed by JPMorgan Securities, one of the stock-offering underwriters and one of the banks arranging the notes.
A portion of Hertz’s revolver credit facility expires this month, giving the company room to issue more first lien debt. A convertible bond issue will be less expensive than a high-yield bond, and the PIK structure also allows the company not to pay coupons directly.
The company said it would use the proceeds from the notes to repay outstanding debt.
“At this price, the offering will be worth more than 25 million shares, which is 21% of their float,” said Matt Maley, chief market strategist at Miller Tabak + Co. “This would significantly weaken the offer.”
Hertz said in the filing that “unexpected softness in the used car market” would increase its depreciation costs. As a result, adjusted corporate earnings before interest, taxes, depreciation and amortization in the second quarter will not exceed $80 million, below analyst estimates compiled by Bloomberg.
Profit warning extends volatility for rental car company. Hertz spent much of the past year scaling back operations, working on more profitable ways to sell its used cars, and refreshing its vehicle fleet with more sought-after models to reduce depreciation costs. This is a key objective as Hertz strives to generate positive earnings this year.
Written by Reshmi Basu, Irene Garcia Perez and Jordan Fitzgerald
