“Everything is a little upside down…as a matter of fact the wheels have fallen off.” Bob Dylan
After filing for Chapter 11 protection on the 22nd of May, the share price of Hertz fell to US$0.59 and the bonds, which rank higher than equity in the capital structure fell to US 10 cents in the dollar. This is not untoward; it is what followed that has most investors baffled. Despite the Hertz bonds trading at levels suggesting investors were unlikely to get their money back, the share price of the common stock (while in Chapter 11 mind you) rose almost 10x to close at US$5.53 on the 8th of June. While the bond pricing had also recovered somewhat, the price of the bonds still suggested that bondholders expect to only receive ~50% of their face value, leaving absolutely nothing for equity holders. Despite this fact, Hertz used the rally in their share price to gain (unbelievably) approval to issue up to US$1bn in fresh equity which included many references to the Chapter 11 issues that the company faces such as “may render our common stock worthless”. Fortunately, we have seen some rational regulatory oversight with the Securities and Exchange Commission (SEC) stepping in to put a halt to the issue of worthless equity.
• Valuations matter
• Market exuberance remains; patience, liquidity and diversity required
• Attractive stressed opportunities will present themselves
• There is little transparency of future earnings
• Focus will shift from liquidity to solvency