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Hertz Shares Plunge After Debt Plan and Profit Warning
Stock Drops 41%, Steepest Since Company's 2021 Listing
Key Takeaways:
- Hertz dropped 41% June 24 after the car renter warned of earnings pressure and planned new debt.
- The company plans $300 million in convertible PIK notes and $100 million in shares designed to help note buyers short the stock.
- Hertz said it will use note proceeds to repay debt as used-car weakness pushes second-quarter adjusted EBITDA toward $80 million or less.
Hertz Global Holdings stock plunged the most since its initial public offering five years ago after the car renter warned of pressure on earnings and plans to issue new debt.
The company is taking an unusual approach to issuing debt, concurrently serving up $100 million of shares that are designed to be shorted alongside a $300 million offering of convertible payment-in-kind (PIK) notes.
The shares will be offered to buyers of the convertible notes for the purpose of selling the stock short and hedging their investment, Hertz said June 24. In a regulatory filing issued ahead of statements about the offerings, the company warned that profit this quarter is trending toward the low end of its expectations.
The flurry of announcements sent Hertz shares plunging 41%, the steepest decline since the company’s 2021 listing.
“It is a sign that they see the need to do something drastic,” said Mark Hackett, chief market strategist at Nationwide. “This has been a fragile story for some time, and today may signal capitulation of those that had been holding on.”
Convertible bond buyers often buy shares alongside the notes to hedge their positions. But in the case of Hertz, there’s limited availability of stock to borrow and sell short. The company is issuing more shares because much of its existing stock is heavily concentrated in the hands of institutional and private equity investors, and its shares already are heavily shorted.
The shares will be borrowed by JPMorgan Securities, which is one of the stock-offering underwriters and also one of the banks arranging the notes.
Hertz has part of its revolver credit facility expiring this month, which gives room to the company to issue more first lien debt. A convertible bond issue will be less costly than a high-yield bond, and the PIK structure also allows the company not to pay a straight coupon.
The company said it will use proceeds from the notes to repay outstanding debts.
“At this price, the offering will be over 25 million shares, which is 21% of their float,” said Matt Maley, chief market strategist at Miller Tabak + Co. “That will make this offering significantly dilutive.”
Hertz said in the filing that “unexpected softness in the used car market” will raise its depreciation costs. As a result, adjusted corporate earnings before interest, taxes, depreciation and amortization in the second quarter will be no more than $80 million, short of analyst estimates compiled by Bloomberg.
The profit warning extends a volatile stretch for the rental-car company. Hertz spent much of the past year slimming down operations, working more profitable avenues to sell its used cars and freshening its fleet of vehicles with models that are more in demand to reduce depreciation costs. That’s a key objective as Hertz tries to get to positive earnings this year.
Written by Reshmi Basu, Irene García Pérez and Jordan Fitzgerald
