By Becky Yerak, Peg Brickley and Aisha Al-Muslim
A bankruptcy judge on Friday allowed Hertz Global Holdings Inc. to raise new equity from a counterintuitive stock rally while under severe financial strain.
The car-rental company hopes to raise up to $1 billion in new equity, a seemingly unprecedented move from a large bankrupt company eager to capitalize on market anomalies.
Bankruptcy experts said the planned stock sale raises questions about whether a company under chapter 11 protection can exploit equity markets for financing when the value of its shares, as with nearly all bankrupt issuers, is at significant risk of being wiped out.
"I will give them credit for creativity -- trying to turn something potentially worthless into a pot of cash," said John Penn, a bankruptcy lawyer at Perkins Coie LLP who isn't involved in the Hertz case.
Hertz appeared in the U.S. Bankruptcy Court in Wilmington, Del., on Friday to seek permission for the stock sale, which the company has described as a "unique opportunity" to raise capital on more favorable terms than the strings-attached loans that bankrupt companies more typically receive.
The company filed for bankruptcy last month, saddled with about $19 billion in debt and hundreds of thousands of vehicles that have been largely idled as Americans travel less due to the coronavirus pandemic.
Bankruptcies typically wipe out shareholders, save for rare instances in which the corporate debt can be paid in full and money is left over. Hertz shares have nonetheless gone on a gravity-defying rally since its bankruptcy filing, even though the company's bonds continue to trade at distressed levels, indicating little faith among creditors they can be fully repaid.
Shares of other companies in or near bankruptcy, such as Chesapeake Energy Corp., Whiting Petroleum Corp. and J.C. Penney Co., have also rallied, seemingly inexplicably, in recent weeks.
Behind the speculative frenzy, experts said, are the Federal Reserve's forceful actions to stabilize markets, rising investor enthusiasm over the economy reopening and hordes of individual investors who are new to the market and showing a strong appetite for risk.
Unfortunately for potential buyers, Hertz bonds are trading deeply below par, indicating that the odds for any value left over for shareholders are low, said Nick Mazing, research director at investment research platform Sentieo.
Jared Ellias, a law professor at the University of California, Hastings College of Law who has studied hundreds of bankruptcies, said he couldn't find a similar maneuver in the past for a company of comparable size.
Hertz could believe that its shares do have value while its corporate debt is simply mispriced, he said. The company's nearly $3 billion of unsecured bonds traded at around 40 cents on the dollar Friday.
"But to the extent the debt pricing is accurate, and there won't be money for shareholders at the end of this case, then what they appear to be looking for is a group of investors, perhaps made up significantly of retail investors, who will buy stock from them that will ultimately be worthless," Mr. Ellias said.
Companies in chapter 11 shouldn't look to finance their bankruptcies with what amounts to donations from individual investors, he said.
Jonathan Lipson, a Temple University law professor, said the timing for Hertz's request is problematic because creditors haven't weighed in and the company's most up-to-date financial details haven't been filed. He acknowledged, though, that Hertz shares could theoretically rebound and retain value despite the bankruptcy.
The car-rental company is in a different situation than PG&E Corp., which is also bankrupt, but headed to market to sell $9 billion in new equity as it prepares to exit chapter 11. PG&E said from the start of its chapter 11 case that it would preserve shareholder value.
The New York Stock Exchange, where Hertz shares are listed, didn't immediately respond to requests for comment. The NYSE has moved to delist the shares, but they continue to trade pending an appeal by Hertz. The Securities and Exchange Commission, which regulates the U.S. stock market, declined to comment.
Billionaire Carl Icahn sold his entire stake in Hertz at roughly 72 cents a share, days after it filed for bankruptcy. A steady stream of directors and executives also have been selling Hertz stock since the chapter 11 filing on May 22, at prices ranging from about $1 to roughly $5.
--Alexander Gladstone and Kimberly Chin contributed to this article.
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