Hertz Proposes Shareholder Payout as Part of Bankruptcy-Exit Plan -- 2nd Update

By Becky Yerak and Alexander Gladstone

Hertz Global Holdings Inc. agreed to provide some value to equity holders when it leaves chapter 11, vindicating the individual traders who have insisted the company is worth something despite its bankruptcy filing.

Hertz proposed in a chapter 11 exit plan on Wednesday that current stockholders receive warrants to purchase up to 4% of the restructured business, the first time the company has said it is worth enough to distribute some value to its owners.

The shareholder distribution would amount to a recovery of 60 to 70 cents per share, a "material return to equity," Hertz lawyer Thomas Lauria said during a court hearing Wednesday.

If approved by the U.S. Bankruptcy Court in Wilmington, Del., that outcome would make Hertz a relative rarity in corporate bankruptcies, in which equity ranks behind debt and most often is wiped out. Hertz shares closed at $1.74 on Wednesday, down 8.4% on the day but up 36% year to date.

The proposed distribution to equity is part of a restructuring proposal put forth by Dundon Capital Partners LLC, Centerbridge Partners LP and Warburg Pincus LLC, selected by Hertz earlier this month after a competitive process to finance the company's exit from chapter 11.

Hertz has the exclusive right to propose restructuring terms, meaning that any bankruptcy plan needs the company's support to advance to creditors for a vote. Hertz is racing to exit from bankruptcy as soon as it can, concerned about the risk that favorable market conditions could turn against it.

Companies generally enter bankruptcy when they can't cover their debts, much less pay anything on account of their equity. When shareholders do receive anything, it is often because a short-term stress fades, an industry recovers more quickly than expected, or market conditions change. Past examples include onetime mall giant General Growth Properties Inc. in 2010 and former American Airlines parent AMR Corp. in 2013.

Risk-hungry individual investors were convinced Hertz had value after it filed for bankruptcy last year, piling into the company and sending its stock up nearly 900% before declining again, a speculative frenzy that presaged the GameStop Corp. phenomenon.

Even after Hertz shares fell back to earth last year and were delisted from the New York Stock Exchange, some enthusiasts continued to tout the company in online forums, confident in a comeback.

Now it appears they were on to something all along. Enthusiasm for Hertz has broadened in recent weeks to larger investors amid a rebound in U.S. business and leisure travel that has been fueled by Covid-19 vaccination campaigns. Airlines are adding flights within the U.S. and nearby destinations, optimistic about a summer vacation boom and encouraged by a rise in bookings.

As recently as last week, Hertz had insisted its equity was worthless because the company wasn't worth enough to cover its debt and had no surplus of value left over for stockholders. Hertz entered chapter 11 with roughly $19 billion owed to banks and bondholders, one of the largest companies driven to default by the Covid-19 pandemic.

But a bidding war between rival consortia of investors in recent weeks drove up Hertz's value enough to put its equity in the money. Competition for control of Hertz continues as it explores an alternative bid, submitted Tuesday, from an investment group led by Knighthead Capital Management LLC and Certares Management LLC that also includes an equity payout.

The competing plan includes a 50-cent payout per share in cash for stockholders and gives them the chance to participate in a $1 billion rights offering, Andrew Glenn, a lawyer for hedge-fund shareholders backing Knighthead and Certares, said at the court hearing. He argued that his group's plan is a better deal because it provides the payout in cash to stockholders, rather than from warrants.

A Hertz board committee determined that the restructuring terms put forth by Knighthead and Certares were incomplete, but could lead to a superior proposal if developed further, Mr. Lauria said Wednesday.

Hertz will continue to pursue the alternate proposal, but the company needs to move quickly on the offer on the table from Dundon, Centerbridge and Warburg, Mr. Lauria said. He said the company's European operations have an immediate need for cash to refurbish the rental-car fleet there.

The judge overseeing the bankruptcy said Wednesday that to lock in that proposal, Hertz could commit to a roughly $75 million breakup fee, payable to the plan sponsors if the company ultimately selects a different offer.

Considering that investors have valued the business at roughly $5 billion to $6 billion, the fee shouldn't be too big an obstacle for other Hertz bidders to overcome, the company's investment banker William Derrough testified on Wednesday.

The competition for Hertz also has led to a rally in prices for its unsecured bonds, meaning that bondholders stand to do well on debt bought at a discount, when the company's prospects weren't as bright.

Write to Becky Yerak at [e-mail] and Alexander Gladstone at [e-mail]

(END) Dow Jones Newswires

04-21-21 1742ET