Hertz bonds and equity nosedive, but ABS hold steady, as declining fleet value comes under microscope

Hertz’s corporate bonds and equity plummeted this morning as investors reacted to a news report saying the company could face a USD 1bn-USD 1.5bn liquidity shortfall in the coming months and may need to seek bankruptcy protection absent a government bailout, according to four sources following the company.

The car rental chain’s USD 500m 6.25% senior unsecured notes due 2022 fell 20 points this morning to trade at 46 yielding 44.137% from 66.637 yielding 25.026% yesterday. The USD 800m 5.5% senior unsecured notes due 2024 deflated to 40.25 from trades at 52 yesterday, according to MarketAxess.

The report in the New York Post alleged that the declining value of the company’s fleet of rental cars – which backs billions in securitized debt – may mean that Hertz will have to post additional collateral to its ABS trusts to compensate for the decrease in collateral value.

As reported, the company’s ABS trusts conduct two monthly vehicle valuation tests — a mark-to-market test, and an actual vehicle sale, or disposition, test. If the overall value of the collateral vehicles falls below a certain level in either test, Hertz Global must act to boost the credit protection of the ABS bonds by adding more vehicles to the trusts’ collateral pool, though deal documents also require Hertz to maintain a certain amount of cash in the deals.

ABS bonds are bankruptcy-remote. If Hertz defaults on its loan from the trust, the trust can liquidate the vehicle collateral to repay the notes. In part because they are protected by hard assets, Hertz rental ABS bonds did not react today to the Post report. For instance, a USD 10m 2.67% HERTZ 2019-3A A ABS was offered today at Swaps+ 325bps, 25bps tight of offer levels last week. In early March, in contrast, the bond traded at S+ 119bps.

“I can tell you many investors probably don’t even realize there’s a problem,” said a rental car ABS investor. “And/or they think that somehow it’s going to be supplemented or fixed.”

Any change to the terms of Hertz ABS deals would require 100% bondholder approval, according to the investor and a securitization lawyer. That is an onerous task that many consider practically impossible — and certainly improbable in a timely manner. Reaching investors requires sending messages through custodial agents and hoping they respond, according to the investor.

“The main problem is you’re talking 60, 90 days often to even assemble a group of investors to try to do something,” the investor said. “Often, you’ve already passed the timeframe before something blows up.”

It is possible that some Hertz transactions may require only a majority vote of investors to waive an event of default, according to the lawyer. But, again, it can take months to reach such a group of investors and secure the votes to proceed. Another source believes that even an EOD waiver requires 100% consent.

Meanwhile, though the value of used cars may come under pressure as consumers drive less, the halt in new car production by OEMs could counter the impact to some extent, one of the sources said.

With global air travel almost non-existent, investors expect Hertz to lose most of its revenue while regions across the world institute some form of economic lockdown, sources said.

“Business is tough, you can’t remove a lot of fixed costs. Airport traffic is virtually zero. Cash burn is going to be massive,” one of the sources said.

On the liquidity front, two sources modeled that Hertz may burn through about USD 500m in cash per quarter, post lockdown.

The company said in a 26 March release that it had access to USD 1bn in liquidity, and that it had increased its vehicle debt capacity by USD 750m in February. In the release Hertz said that it doesn’t anticipate any vehicle debt financing requirements for its global car rental business for the remainder of the year.

The company also acknowledged at the time that it was actively engaging with US and European governments to seek financial support.

Hertz’s equity dropped 16% today to USD 4.87 per share for a market cap of USD 692m.

Hertz did not respond to a request for comment.

2020 Debtwire

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