Hertz’s turnaround story drives demand for exit loan, as books fill

Investors are piling into Hertz’s proposed exit financing, as the commitment deadline has been accelerated to today from its initial deadline of next Tuesday (15 June), according to six sources following the situation.   

For bullish investors, the investment thesis is grounded in the belief that the rental car market will remain strong, with strong trading comps in the industry supporting that prognosis, sources added.  

Price talk on the Barclays-led USD 1.3bn exit term loan due 2028 is Libor+375-400bps at a 99 OID and a 0.50% floor. Proceeds from the deal will be used to fund plan distributions under its bankruptcy plan, which was confirmed yesterday.   

Most of the book was filled at launch with many reverse orders placed, two of the sources said.   

Along with the proposed term loan, Hertz also has a USD 1.5bn post-reorg revolver to fund working capital needs.   

Hertz was among the largest companies to file for bankruptcy protection during the COVID pandemic. But now more than a year later, demand for car rentals has surged, as many consumers remain wary of air travel.  

As such, Hertz is projecting strong growth in the years to come. For 2020, revenue skated to USD 5.258bn, while adjusted EBITDA totaled negative USD 995m.   

But Hertz projects EBITDA at USD 635m in 2022, and then ramps up to USD 859m in 2023, according to court documents.  

The company expects revenue to total USD 7.631bn in 2022 and then rise to USD 8.717bn in 2023.  

Right now, rental car demand may be exceeding supply, but some investors caution that Hertz’s turnaround story could hit a bumpy road as more competition from rideshare services like Lyft and Uber will also return in tandem with the travel market.   

Moreover, the company’s continued cash burn is a point of concern. Hertz is projecting a USD 850m cash burn in 2021 and USD 250m in 2022, as capex is used to restock the fleet and conduct oil changes and car maintenance, according to two of the sources.

Pro forma liquidity totals USD 2.27bn through USD 774m of cash and an untapped USD 1.5bn revolver, two of the sources said. Hertz is projecting pro forma leverage of roughly 5x in 2021 through USD 288m of pro forma adjusted EBITDA and in the 3.5x range in 2022, they added.   

Some prospective investors are using Avis Budget Group as a comp, whose equity has skyrocketed over the last six months and debt yields have tightened roughly 100bps across the debt structure.

Sources added that Avis’s operations have benefitted from cutting capital spending and reducing its balance sheet debt. Avis projects that 2Q21 will be a better overall quarter than 2Q19, supporting investors’ faith in Hertz’s turnaround.   

Fitch also predicted in a May report on Avis, “The robust wholesale vehicle market in 2021 continues to support strong used values into 2Q21, despite any related ongoing risks from the continuing pandemic impacting the auto, travel and rental car sectors.”  

Avis’s USD 600m 5.375% senior unsecured notes due 2029 traded yesterday at 104 to yield 4.424%, compared to trades at par in mid-February, according to MarketAxess. The USD 375m 5.25% senior unsecured notes due 2025 traded yesterday at 101.75 to yield 4.014%, compared to trades at 99.75 to yield 5.316% in January.   

Hertz’s equity has also surged to USD 6.89 per share today and a market cap of USD 1.075bn, compared to trades at 1.30 per share at the beginning of the year.  

Hertz’s USD 900m 6% senior unsecured notes due 2028 last traded at 107.125 to yield 4.73% on 7 June, compared to trades in the 90s in March and in the 50s in January, according to MarketAxess.  

The USD 800m 5.5% senior unsecured notes due 2024 traded on 3 June at 102.8 to yield 4.59%, compared to trades in the 90s in March and in the 60s in January. 

Hertz plans to exit bankruptcy court protection this summer. Its plan is sponsored by a USD 6bn bid from Knighthead Capital Management, Certares Opportunities and Apollo Capital Management.  

Under the plan, all creditors will be paid in full and equity holders would receive cash equal to USD 1.53 per share, 3% of reorganized Hertz’s equity, and either 30-year warrants for 18% of Hertz’s equity or the ability to participate in the rights offering for a total value of USD 1.15bn.  

The company’s plan is funded by USD 2.78bn in direct common stock investments from the Knighthead and Certares group, USD 1.5bn of new preferred stock to Apollo Capital Management and a fully backstopped rights offering for existing shareholders to purchase an additional USD 1.64bn in common stock.

Messages left with Hertz and Barclays were not returned.

2021 Debtwire

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