Car rental giant officially exits bankruptcy with one question: will it survive long-term?

ESTERO—The Hertz Corp. exited bankruptcy Wednesday June 30 with $5.9 billion in capital, its debt load reduced by 80%, a new ticker symbol and a new board of directors that includes the former president and CEO of the Ford Motor Co.

The June 30 exit comes just over 13 months after the Lee County-based rent-a-car giant filed Chapter 11 to fight off creditors it was unable to pay because of a downturn caused by the pandemic.

Hertz is leaving the protection of the bankruptcy court with about $5 billion in debt gone, including all of its European debt, and with a $2.8 billion credit line and $7 billion in financing for its vehicle inventory. Hertz stock will continue to be traded over the counter until it is re-listed on one of the national exchanges. Beginning Thursday July 1, its new ticker symbol will be HTZZ.

Investment firms Knighthead Capital Management, Certares Opportunities and Apollo Capital Management are among those providing capital to fund the exit plan.

Delaware Bankruptcy Judge Mary Walrath approved the exit plan June 10.

In a statement announcing the exit, Henry Keizer, Hertz’s outgoing board chairman, says despite the challenges the company faced “we stayed focused on stabilizing the business and seizing opportunities to mitigate losses and create value for our stakeholders.”

“When the economy began to show signs of recovery earlier this year, we were perfectly positioned to drive a competitive process that would maximize recoveries. The result…is remarkable.”

In the statement, Keizer cited, as the company did repeatedly in court papers, the pandemic as the main reason Hertz sought bankruptcy protection, calling what it dealt with as “epic and unprecedented.”

Yet all of Hertz’s competitors faced identical headwinds and it was the only major rent-a-car company to file for bankruptcy during the pandemic.

The question, then, is whether Hertz has done enough and made the fundamental changes necessary to avoid the fate of a companies like Radio Shack that have exited bankruptcy only to find themselves back a couple of years later.

Only time will tell what the answer is.

The story of what led to Hertz filing for bankruptcy May 22, 2020 is spelled out in thousands of pages of court documents.

These documents show the vast complexity of a global company with about $25 billion in debt. As of June 30, 2020, there have been more than 5,400 documents filed in the case, some as simple as a two-page order naming an attorney and others as complex as the nearly 200-page exit plan.

What the documents provide is a comprehensive narrative of what led Hertz to bankruptcy.

The most of enlightening of these is the declaration of then Executive Vice President and CFO Jamere Jackson. Jackson left Hertz in September and could not be reached for comment.

Jackson lays out the issues the company was facing in the final few months before the bankruptcy and offers a portrait of just how devastating the pandemic was and how cash reserves, already dropping, were severely taxed.

Yet coming into 2020, things were looking good for Hertz.

After a few difficult years, the past 10 quarters had shown year-over-year growth in revenue and the first two months of the year pointed to that continuing. In January and February, revenue rose 6% due to the U.S. car rental market growing 8%.

The first signs of trouble began in early March, when states began to shut down and people locked themselves in. By the end of the month, global revenue was down 30%, Jackson says.

It was much worse in April, the first full month operating in the pandemic, when revenue fell 73% from the previous year.

It wasn’t just that the travel industry had shut down. Hertz also depended on business with insurance companies that provide customers with rental cars when they’ve been in accidents. With fewer people on the streets, there were fewer accidents.

From March 21 through the day the company filed for bankruptcy, May 22, 2020, daily reservations fell 90%,

“Unfortunately,” Jackson says, “the COVID-19 pandemic left no corner of our rental car business untouched.”

Another whammy? Hertz owed payments for its fleet of vehicles.

One of the leasing agreements the company used to maintain its fleet called for Hertz to pay for the depreciation of the vehicles. Jackson says a 1% drop in value translated into $75 million in depreciation payments to stay in compliance.

With the market for used cars coming to a standstill, values were falling at breakneck speeds.

One solution would have been to begin selling off some of the fleet either through vehicle auctions or Hertz’s used car lots.

But those avenues were practically closed.

Between March 21 and April 15, daily sales at Hertz’s used car lots never reached 400 sales. That was down from more than 1,000 sales a day between Feb. 9 and March 14. As for auto auctions, they were either shut down or only operating online.

Despite that downturn in the used car market, the used car pricing guides, which is what drove the deprecation values the company’s payments were tied to, continued to be published. In March, vehicles values dropped nearly 1.5% and in April in they fell nearly 2.5%.

So in order to remain in compliance Hertz owed $135 million. When coupled with other payments due for that agreement, that number rose to $389.5 million, Jackson says.

The payment was due April 27, 2020.

“Making this payment,” Jackson says in court papers, “would have consumed a substantial portion of the company’s available cash, with the likelihood of larger depreciation true-up payments coming due in following months.”

With the payment due, Hertz tried to negotiate with the lender to lower the amount of the lease payment.

But they couldn’t come to an agreement, Jackson says, and Hertz “elected to not to make the payment and defaulted on its lease.”

Meanwhile, Hertz had been making deep cuts since March in the hopes of holding onto the liquid assets it would need to ride out the storm. It cut back on the purchase of new vehicles and marketing; it consolidated leases at off-airport sites in the U.S. and Europe; it renegotiated concession agreements with airports.

And it cut employees.

The “workforce cost management,” as Jackson calls it, began in March 2020 with furloughs. The hope was that they’d be temporary. But by April it had become clear to Hertz that the shutdown “would not be a transient interruption in its business.”

The result? By May 22, the day the company filed for bankruptcy, 21,000 employees had been affected by the moves with about 14,400 permanently losing their jobs.

According to filings to meet Worker Adjustment and Retraining Notification (WARN) Act requirements, which requires employers to provide notice 60 days in advance of plant closings and mass layoffs, Hertz laid off 1,046 people in Florida in 2020.

One of the consequences of failing to pay the lease payment on April 27, 2020 was that the vehicles financed through that program would be liquidated, much like when a car is sold off after being repossessed.

The vehicles were scheduled for liquidation May 5.

On May 4, in an effort to avoid defaulting on other loans, Hertz worked out an agreement with several lenders to protect its fleet, which it couldn’t operate without, “and avoid widespread cross-defaults across its capital structure.”

The agreement was good through May 22.

Between May 5 and May 22, company officials worked to talk to as many lenders as possible, trying to get extensions and to find ways to reorganize the debt without turning to bankruptcy.

There were loans in Australia and Europe that needed to be addressed along with money due in the U.S. and Canada.

Amid these shuttle negotiations, the company announced May 18 that it was replacing President and CEO Kathryn Marinello. Stone, who was vice president and chief retail operations officer, was named president. (Marinello was named president and CEO of Clearwater-based PODS, a self-storage and moving company, in January. She remains on the board of auto company Volvo.)

Stone, meanwhile, was the fourth CEO at Hertz in six years.

Marinello became CEO in 2016 after the company failed to meet Wall Street expectations for several quarters and the stock price fell. She was the handpicked choice of noted investor Carl Icahn, the majority shareholder at the time.

On an earnings call with investors 10 days before the company filed for bankruptcy, and as officials worked frantically to hammer out agreements on its debts, Marinello discussed how the company was being battered by the effects of the pandemic and was working through its issues.

According to transcripts from the May 12 earnings call posted on the investment website Seeking Alpha, there was not a single mention of bankruptcy. Company officials also did not take questions from analysts, an unusual move.

“There’s only so long that company’s reserves will carry them. So, we are focusing on safeguarding current liquidity and increasing cash through efficiencies and deferred investments,” Marinello told investors, according to the transcript. “At the same time, from an operating perspective, we’re continuing to service customers at the highest levels with a safe fleet, in the manner they’ve come to trust from our iconic brand.”

Hertz was able to get concessions from some creditors in European countries, but not in North America.

With the agreements due to expire May 22, Jackson says, “the company was left with no choice but to commence these Chapter 11 cases.”

In a special meeting held May 22, Hertz’s board of directors voted to authorize the company to file for bankruptcy protection in Delaware. The eight-member board includes Independent Non-Executive Chairman Henry Keizer, a former COO of professional services and tax firm KPMG; David Barnes a former top executive for UPS; Anindita Mukherjee, the current chairwoman and CEO of alcholic beverage giant Pernod Ricard; and former Norwegian Cruise Line Holdings CEO Kevin Sheehan. Stone, the current Hertz CEO, is also on the board.

In the resolution adopted that day, the board decided bankruptcy was best because “notwithstanding the significant actions (Hertz has) taken to reduce expenses in light of the downturn in business, revenue declines have outpaced cost.”

The initial filing shows the company had $25.8 billion in assets and $24.3 billion in debt on March 31.

Jackson, in court papers, says Hertz entered bankruptcy for the “breathing room Chapter 11 provides,” to hang on to its liquidity, stabilize operations, develop a business plan that works in a post COVID-19 world and reach agreements with creditors.

While Hertz seems to have accomplished much of what it set out to do, it will take a long time to find out if the plan actually worked. One sign to watch for is its willingness to adapt in a changing world where desks at an airport may not be enough.

A 2021 study from Global Industry Analysts, a San Jose, California research firm, says easing of travel restrictions isn’t going to be enough for any rental car company to rebound after the pandemic. That’s especially true since a full return to normal could take some time and may be fraught with fits and starts. “Rental companies will feel the need now more than ever to reinvent their business model...” the study finds. That's a phrase Hertz and its peers have heard for years, given the rise in ride-hailing and other transportation trends.

A company the size of Hertz is certainly capable of reinvention, analysts say, but the question is, is it willing?