Rental car company Hertz files for bankruptcy

Car rental giant Hertz collapses with $29bn in debt, but company insists Australian arm not impacted by process.

The Florida-based car rental company entered bankruptcy proceedings in the US, hoping to survive a drop-off in ground traffic. Picture: Getty/AFP

Hertz Global Holdings, one of the nation’s largest car-rental companies, filed for bankruptcy protection on Friday, saddled with about $US19bn ($29bn) in debt and nearly 700,000 vehicles that have been largely idled because of the coronavirus.

The Florida-based company entered chapter 11 proceedings in the US Bankruptcy Court in Wilmington, Delaware, hoping to survive a drop-off in ground traffic from the pandemic and avoid a forced liquidation of its vehicle fleet.

Hertz’s main international operating regions, including Europe, Australia and New Zealand, are not included in the US chapter 11 proceedings and are continuing normal operations, Hertz said in a statement.

The Wall Street Journal reported earlier on Friday that Hertz had failed to reach a standstill agreement with its top lenders and was preparing to file for bankruptcy as soon as that evening.

The company’s collapse marks one of the highest-profile corporate defaults stemming from the pandemic’s impact on air and ground travel, though Hertz also had challenges before the current economic crisis. Even before the COVID-19 outbreak, Hertz had been struggling with competition from peers including Enterprise Holdings and Avis Budget Group, as well as from ride-hailing services such as Uber Technologies. and Lyft. The company lost some $US58m last year, its fourth consecutive annual net loss.

But Hertz’s business was hammered by the onset of the coronavirus, as people worldwide bunkered in at home and global travel shrivelled up. As businesses adapt by conducting meetings remotely, business travel may not ­return to pre-pandemic levels, according to bankers and analysts who follow Hertz.

Hertz didn’t reach a deal with creditors before entering chapter 11, heightening the risk of a full liquidation of the fleet, although the company and investors have several weeks to work out an agreement avoiding that outcome, according to sources.

Hertz has spent years trying to restructure its business, and has blown through four chief executives in less than a decade. Most ­recently, former CEO Kathryn Marinello was replaced Monday by Paul Stone, who previously served as the company’s executive vice-president and chief retail ­operations officer for North America.

Hertz has also had a debt problem that can be traced back to a 2005 leveraged buyout by private-equity firms.

Founded in Chicago in 1918 and originally known as Rent-a-Car, Hertz opened its first airport car-rental facility at Midway Airport in 1932. The company’s owners have included RCA and later Ford, which sold Hertz to a buyout group led by Clayton Dubilier & Rice in 2005 for $US5.6bn.

The company went public in 2006, and activist investor Carl Icahn, who started acquiring Hertz shares in 2014, now owns more than one-third of the company and has placed three of his representatives on the board.

The pandemic has diminished automotive traffic in the US, squelched car sales and cut into rental reservations at Hertz. The Wall Street Journal reported in early May that Hertz, the nation’s second-largest rental-car company by fleet size behind Enterprise, was preparing for a bankruptcy filing.

The bankruptcy is expected to be complex given Hertz’s vast debt and corporate structure, which includes $US14.4bn of vehicle-backed bonds at subsidiaries that aren’t part of the chapter 11 filing.

Like Avis and some other rental car companies, Hertz doesn’t own its vehicles. The company leases its rental-car fleet, nearly 700,000 ­vehicles in total, from separate ­financing subsidiaries. The lease payments are earmarked for investors that own bonds backed by the fleet.

Now that Hertz has filed for bankruptcy, investors with rights to the vehicle fleet have to wait for 60 days before they can foreclose on and sell the cars. Hertz and its creditors would probably aim to prevent a complete liquidation and strike a deal to downsize the fleet while keeping some vehicles in operation, sources said.

With the $US14.4bn in vehicle-finance bonds so widely held — by pension funds, mutual funds and structured-credit funds — the company has faced difficulty co-ordinating with bondholders.

Rental-car companies play an important role in supplying newer models to the used-vehicle market. Hertz also is a major customer for US carmakers, purchasing about half of its fleet from General Motors, Ford and Fiat Chrysler last year.

Analysts say Hertz could be forced to sell part or all of its fleet into an unusually weak market. But the possible liquidation would come at a time when demand for used vehicles is rising slightly, and pricing in the market is showing signs of recovery after hitting historic lows in April.

“Any ripple effect will be less than it was six weeks ago,” said Zo Rahim, an analyst for Cox Automotive.

The Wall Street Journal