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A lot of the Hertz articles, including this one, fail to call out that the vast majority of Hertz’s debt is vehicle debt. They finance new cars, rent them out f

A lot of the Hertz articles, including this one, fail to call out that the vast majority of Hertz’s debt is vehicle debt. They finance new cars, rent them out for a while, then dispose of them. That all works fine and vehicle debt is not a problem when rental income covers the interest+depreciation on the vehicles. Obviously it becomes a problem when rental income disappears at the same time depreciation increases because of a depressed used car market. Hertz clearly didn’t plan for that. But breathlessly calling out the headline debt number without acknowledging that vehicle debt is a reasonable strategy for a rental car company is misleading at best.

osrec 6y ago
Do you know what proportion is vehicle debt? If it's 90%, then you have a point. If it's significantly lower, then it's certainly questionable. Also, why redeem strategic debt due for 2021 so early?
- Dwolb 6y ago
  Looks like from their first quarter 10-Q 14B of their 18B in debt is specifically vehicle debt, so 77% [1]. [1] http://ir.hertz.com/sec-filings http://ir.hertz.com/sec-filings
  - airstrike 6y ago
    Better link: https://www.bamsec.com/filing/165785320000049/1?cik=1657853&hl=89202:89208&hl_id=e1fnwvri_ https://www.bamsec.com/filing/165785320000049/1?cik=1657853&...
fpoling 6y ago
If most of the debt is in the cars and the used car marked is dry, why Hertz failed to re-negotiate the loans? Or has they entered bankruptcy to put extra pressure on banks?
- bobthepanda 6y ago
  Bankruptcy is a legally standard way of doing that. Chapter 11 can result in creditors being forced to take losses.
- projektfu 6y ago
  I assume they’re secured loans, so the lenders would rather repossess the cars in bankruptcy and sell them themselves rather than support unsecured holders. If not secured, I have no idea.
- kube-system 6y ago
  I'm guessing they probably get very good deals on the debt to begin with, (even a consumer can often get 0% on a single car) but bankruptcy will definitely restructure that debt at a minimum.
mc32 6y ago
But why aren’t avis and enterprise in the same straits as hertz? Sure they have difficulties, but aren’t yet seeking debt relief.
- at-fates-hands 6y ago
  They were able to better manage their fleets. They also didn't increase their pricing like Hertz did when their debt was spiraling out of control which allowed them to take a lot of Hertz business. You can see my three bullet points on the previous response on how they mismanaged their fleet.
- davio 6y ago
  Enterprise is privately owned and I was told they were debt free when I worked there. Enterprise Fleet (i.e. company cars) has different debt covenants.
- skybrian 6y ago
  "While all travel-related companies have been hurt by the pandemic, a big factor for Hertz is its strategy of owning or leasing a large portion of its fleet outright instead of acquiring them through buyback agreements with manufacturers." https://www.bloomberg.com/news/articles/2020-05-25/hertz-says-pandemic-devastated-revenue-leading-to-bankruptcy https://www.bloomberg.com/news/articles/2020-05-25/hertz-say...
raincom 6y ago
Yes, the whole economy is built upon cash flows. The moment cash flows stop, it collapses unless one has a reservoir of savings lying elsewhere. Even in Macro Economics, every model has to be stock-flow consistent (check Wynne Godley's work on this).
- danesparza 6y ago
  Not all of it. The smart companies are debt free, and are in a much better financial position right now. I'm not saying they're not hurting. I'm just saying they have a better chance of being around still when this pandemic is over. Side note: You can run your personal finances 'debt free' and be in a better position when shit hits the fan too. :-)
  - achillesheels 6y ago
    And this summarizes the core problem with "moral hazards". Private companies which actually "prepare" for uncertain market conditions are not being rewarded right now. To make this more concrete, let me give you a recent example for advertising. I was watching a YouTube clip from user Jomboy Media about a baseball strike-out. I noticed in the background the stadium seats had Delta decals for marketing purposes. The fact Delta is permitted, effectively by government authority, to continue to advertise in the "market" because of their bail-out, distorts supply and demand. Namely, Tyson Foods, which was able to be assiduous with their profits over the years and provided wages to their employees during the pandemic, suffer from this blatant "synthetic" market competition.
  - curiousllama 6y ago
    "The smart companies are debt free" - every company has debt. All of them. Apple pays for Iphone parts 30, 60, 90 days after receiving them. That's debt. The only companies that don't take on debt are the ones that nobody will extend credit. Hertz went bankrupt because of the type of debt they took, their lack of cash-on-hand, and the aggressiveness of their business model. But the expected value of their decisions may well have been positive - a single failure is a bad way to evaluate a decision-making methodology.
yborg 6y ago
No, the article was calling out Carl Icahn for directing $57M last year to other companies he controls while being a minority owner of Hertz and the company obtaining $1.4B in new debt maturing no earlier than 2026 to service expiring debt. This is not being used to finance their working inventory except in the following sense "...it’s 500,000 cars act as collateral for $13 billion in financing — and when the collateral drops in value, the company has to make up the difference in cash." [1] The conventional model is leasing deals with the automakers that allow the rental company to sell back the cars at the end of the lease term, not try and dispose of them on the open market. [1] https://nypost.com/2020/05/03/hertz-struggles-during-coronavirus-pandemic-while-avis-stays-afloat/ https://nypost.com/2020/05/03/hertz-struggles-during-coronav...
- echelon 6y ago
  > Carl Icahn for directing $57M last year to other companies he controls while being a minority owner of Hertz Is that legal? Could Carl Ichan be civilly or criminally liable? Potentially go to jail? These debt sheet power moves by billionaires impact stockholders, including retirement and pension funds. When the companies they control go bankrupt, they materially harm the people who can't play at that level. I don't know if this was wrong, but the outcome was certainly not good. It's high stakes gambling with other people's livelihoods.
  - itsoktocry 6y ago
    >Is that legal? Could Carl Ichan be civilly or criminally liable? Potentially go to jail? Ichan is one the world's most famous financiers, rest assured he's got an army high paid lawyers poring over the fine print of these transactions. It's legal, but not ethical, or "right".
    - tchaffee 6y ago
      Those armies of high paid lawyers are not always right. Plenty of companies get it wrong and then pay the price in court.
SomewhatLikely 6y ago
That still doesn't explain the large gap between debt and market cap mentioned in the article. If the debt was all tied up in car assets those would balance out or even lead to a positive market cap difference assuming they can generate profits from renting the cars.
- airstrike 6y ago
  Equity holders stand to lose everything if the company goes south, so if there's so much debt that the future of the company is at risk, there's something call "cost of financial distress" that reduces the value of holding that stock
at-fates-hands 6y ago
Agreed. The two articles I read pointed these out: 1) When Hertz bought Dollar Thrifty their due diligence failed to realize that most of their cars were well past their prime which required another sizable investment to replace all of Dollar Thrifty cars. 2) Frissora tried to hold onto their cars longer past the depreciation period, trying to keep them until 50K miles, way past the industry norm of 30K miles. He also then took these older cars and sent them to their other budget rental companies Dollar Thrifty and Firefly 3) When Tague entered after Frissora left, he started updating a majority of the fleet with sedans, right in the middle of height of the popularity of the SUV. His other blunder was trying to increase prices, thinking the rest of the industry would follow suit. Instead, they kept their pricing lower and started taking big chunks of the Hertz market. All of three of these gross miscalculations caused their debt to increase too fast and ultimately was their undoing.
bonestamp2 6y ago
Another downline impact of this, from an economic standpoint, is automaker sales. Depending on the automaker, fleet sales (much of which are to rental car agencies) can exceed 50% of total vehicle sales. So, if rental agencies aren't buying new cars this year, that will have a massive impact on automakers volume. Now, fleet sales are typically very low margin for automakers, but they still need that volume to keep the lines productive without reducing labor (another economic impact). One bright spot is that most suppliers that I have dealt with only produce about 25% of their volume for new car manufacturing and the rest are "service parts" (repairing existing cars). So, hopefully it won't have chapter 11 impact on most suppliers as the service market should be quote healthy again soon.
- curiousllama 6y ago
  Fleet sales would track pretty closely to rental car use (and therefore travel), right? If so, why would bankruptcies among mostly-commoditized rental car companies impact automaker bottom lines? Avis needs to buy more cars to make up for the volume spike from Hertz' reduction, keeping aggregate sales constant relative to a no-bankruptcy scenario.
  - mark-r 6y ago
    I think the argument is that rental business is down all over, not just at Hertz. Even if all the Hertz business goes to their competitors, the demand for new rental cars will be way down this year.
Shivetya 6y ago
there has been a lot of talk about COVID19 leading to an implosion of used car values, this is affecting big automakers who have large lease portfolios, Ford and GM each are well past twenty billion here so I expect Hertz cannot be helped by this pressure
- iso1631 6y ago
  > there has been a lot of talk about COVID19 leading to an implosion of used car values I don't get that. Surely people still need to travel, and are less likely to take public transport, wouldn't that drive up demand rather than drive down? OK people might not be commuting 5 times a week, and perhaps doing fewer miles overall, but you'd still need a car. If you live in a walkable city, then your requirement for a car hasn't changed if you are no longer walking/subwaying to the office
  - caseyohara 6y ago
    40 million people in the U.S. are unemployed right now and are not likely to buy a new car.
    - iso1631 6y ago
      Hence buying a used car instead... My understanding with americans is that having a car is more essential than having a house
      - Talanes 6y ago
        Most people who need cars have cars, and are putting less wear on them right now.
      - xsmasher 6y ago
        Two working people may need two cars; two unemployed people need one or zero cars.
      - perl4ever 6y ago
aj7 6y ago
The airline industry has a similar model.
- airstrike 6y ago
  Fortunately, there is no Uber for airlines, making them much less susceptible to the kind of secular trends Hertz was facing pre-COVID-19.
baddox 6y ago
> But breathlessly calling out the headline debt number without acknowledging that vehicle debt is a reasonable strategy for a rental car company is misleading at best. Shouldn't the conclusion be that it isn't a reasonable strategy if it causes the company to fail after a couple of months of significantly reduced demand? This global situation is awful, but it's far from unforeseeable.
- abakker 6y ago
  Why should companies plan to weather this kind of thing? Honestly, holding huge amounts of savings is a suboptimal deployment of capital virtually 100% of the time.
  - baddox 6y ago
    Huge amounts of savings? It has only been a few months, and surely that would be considered an extremely tiny runway for a large national or international corporation. But sure, if government bailout money is there for the taking, obviously many large companies won't plan for it.
monadic2 6y ago
> Obviously it becomes a problem when rental income disappears at the same time depreciation increases because of a depressed used car market. Hertz clearly didn’t plan for that. But breathlessly calling out the headline debt number without acknowledging that vehicle debt is a reasonable strategy for a rental car company is misleading at best. This seems contradictory—if it can’t survive in an emergency, it doesn’t seem like a reasonable strategy.
phkahler 6y ago
>> They finance new cars, rent them out for a while, then dispose of them. That all works fine and vehicle debt is not a problem when rental income covers the interest+depreciation on the vehicles. Financing anything is ok until something goes wrong. The problem is that too many people and companies are living paycheck to paycheck. God forbid a company hold enough cash to finance their own operations - no that needs find it's way to the shareholders. A recent headline at CNN said the next problem for the economy was people saving money during the crisis or even paying down debt. SMH.
danesparza 6y ago
There are MANY other car rental companies that are not declaring bankruptcy, as far as I know. I was curious to know why Hertz was one of the first -- and I feel this article did a good job of pointing out that it was largely because of Carl Icahn. (Was I the only who actually said, "Aaaaah ... ok then" when I read his name?)

osrec 6y ago

Do you know what proportion is vehicle debt? If it's 90%, then you have a point. If it's significantly lower, then it's certainly questionable. Also, why redeem strategic debt due for 2021 so early?

Dwolb 6y ago
Looks like from their first quarter 10-Q 14B of their 18B in debt is specifically vehicle debt, so 77% [1]. [1] http://ir.hertz.com/sec-filings http://ir.hertz.com/sec-filings
- airstrike 6y ago
  Better link: https://www.bamsec.com/filing/165785320000049/1?cik=1657853&hl=89202:89208&hl_id=e1fnwvri_ https://www.bamsec.com/filing/165785320000049/1?cik=1657853&...

fpoling 6y ago

If most of the debt is in the cars and the used car marked is dry, why Hertz failed to re-negotiate the loans? Or has they entered bankruptcy to put extra pressure on banks?

bobthepanda 6y ago
Bankruptcy is a legally standard way of doing that. Chapter 11 can result in creditors being forced to take losses.
projektfu 6y ago
I assume they’re secured loans, so the lenders would rather repossess the cars in bankruptcy and sell them themselves rather than support unsecured holders. If not secured, I have no idea.
kube-system 6y ago
I'm guessing they probably get very good deals on the debt to begin with, (even a consumer can often get 0% on a single car) but bankruptcy will definitely restructure that debt at a minimum.

mc32 6y ago

But why aren’t avis and enterprise in the same straits as hertz? Sure they have difficulties, but aren’t yet seeking debt relief.

at-fates-hands 6y ago
They were able to better manage their fleets. They also didn't increase their pricing like Hertz did when their debt was spiraling out of control which allowed them to take a lot of Hertz business. You can see my three bullet points on the previous response on how they mismanaged their fleet.
davio 6y ago
Enterprise is privately owned and I was told they were debt free when I worked there. Enterprise Fleet (i.e. company cars) has different debt covenants.
skybrian 6y ago
"While all travel-related companies have been hurt by the pandemic, a big factor for Hertz is its strategy of owning or leasing a large portion of its fleet outright instead of acquiring them through buyback agreements with manufacturers." https://www.bloomberg.com/news/articles/2020-05-25/hertz-says-pandemic-devastated-revenue-leading-to-bankruptcy https://www.bloomberg.com/news/articles/2020-05-25/hertz-say...

raincom 6y ago

Yes, the whole economy is built upon cash flows. The moment cash flows stop, it collapses unless one has a reservoir of savings lying elsewhere. Even in Macro Economics, every model has to be stock-flow consistent (check Wynne Godley's work on this).

danesparza 6y ago
Not all of it. The smart companies are debt free, and are in a much better financial position right now. I'm not saying they're not hurting. I'm just saying they have a better chance of being around still when this pandemic is over. Side note: You can run your personal finances 'debt free' and be in a better position when shit hits the fan too. :-)
- achillesheels 6y ago
  And this summarizes the core problem with "moral hazards". Private companies which actually "prepare" for uncertain market conditions are not being rewarded right now. To make this more concrete, let me give you a recent example for advertising. I was watching a YouTube clip from user Jomboy Media about a baseball strike-out. I noticed in the background the stadium seats had Delta decals for marketing purposes. The fact Delta is permitted, effectively by government authority, to continue to advertise in the "market" because of their bail-out, distorts supply and demand. Namely, Tyson Foods, which was able to be assiduous with their profits over the years and provided wages to their employees during the pandemic, suffer from this blatant "synthetic" market competition.
- curiousllama 6y ago
  "The smart companies are debt free" - every company has debt. All of them. Apple pays for Iphone parts 30, 60, 90 days after receiving them. That's debt. The only companies that don't take on debt are the ones that nobody will extend credit. Hertz went bankrupt because of the type of debt they took, their lack of cash-on-hand, and the aggressiveness of their business model. But the expected value of their decisions may well have been positive - a single failure is a bad way to evaluate a decision-making methodology.

yborg 6y ago

No, the article was calling out Carl Icahn for directing $57M last year to other companies he controls while being a minority owner of Hertz and the company obtaining $1.4B in new debt maturing no earlier than 2026 to service expiring debt. This is not being used to finance their working inventory except in the following sense "...it’s 500,000 cars act as collateral for $13 billion in financing — and when the collateral drops in value, the company has to make up the difference in cash." [1] The conventional model is leasing deals with the automakers that allow the rental company to sell back the cars at the end of the lease term, not try and dispose of them on the open market. [1] https://nypost.com/2020/05/03/hertz-struggles-during-coronavirus-pandemic-while-avis-stays-afloat/ https://nypost.com/2020/05/03/hertz-struggles-during-coronav...

echelon 6y ago
> Carl Icahn for directing $57M last year to other companies he controls while being a minority owner of Hertz Is that legal? Could Carl Ichan be civilly or criminally liable? Potentially go to jail? These debt sheet power moves by billionaires impact stockholders, including retirement and pension funds. When the companies they control go bankrupt, they materially harm the people who can't play at that level. I don't know if this was wrong, but the outcome was certainly not good. It's high stakes gambling with other people's livelihoods.
- itsoktocry 6y ago
  >Is that legal? Could Carl Ichan be civilly or criminally liable? Potentially go to jail? Ichan is one the world's most famous financiers, rest assured he's got an army high paid lawyers poring over the fine print of these transactions. It's legal, but not ethical, or "right".
  - tchaffee 6y ago
    Those armies of high paid lawyers are not always right. Plenty of companies get it wrong and then pay the price in court.

SomewhatLikely 6y ago

That still doesn't explain the large gap between debt and market cap mentioned in the article. If the debt was all tied up in car assets those would balance out or even lead to a positive market cap difference assuming they can generate profits from renting the cars.

airstrike 6y ago
Equity holders stand to lose everything if the company goes south, so if there's so much debt that the future of the company is at risk, there's something call "cost of financial distress" that reduces the value of holding that stock

at-fates-hands 6y ago

Agreed. The two articles I read pointed these out: 1) When Hertz bought Dollar Thrifty their due diligence failed to realize that most of their cars were well past their prime which required another sizable investment to replace all of Dollar Thrifty cars. 2) Frissora tried to hold onto their cars longer past the depreciation period, trying to keep them until 50K miles, way past the industry norm of 30K miles. He also then took these older cars and sent them to their other budget rental companies Dollar Thrifty and Firefly 3) When Tague entered after Frissora left, he started updating a majority of the fleet with sedans, right in the middle of height of the popularity of the SUV. His other blunder was trying to increase prices, thinking the rest of the industry would follow suit. Instead, they kept their pricing lower and started taking big chunks of the Hertz market. All of three of these gross miscalculations caused their debt to increase too fast and ultimately was their undoing.

bonestamp2 6y ago

Another downline impact of this, from an economic standpoint, is automaker sales. Depending on the automaker, fleet sales (much of which are to rental car agencies) can exceed 50% of total vehicle sales. So, if rental agencies aren't buying new cars this year, that will have a massive impact on automakers volume. Now, fleet sales are typically very low margin for automakers, but they still need that volume to keep the lines productive without reducing labor (another economic impact). One bright spot is that most suppliers that I have dealt with only produce about 25% of their volume for new car manufacturing and the rest are "service parts" (repairing existing cars). So, hopefully it won't have chapter 11 impact on most suppliers as the service market should be quote healthy again soon.

curiousllama 6y ago
Fleet sales would track pretty closely to rental car use (and therefore travel), right? If so, why would bankruptcies among mostly-commoditized rental car companies impact automaker bottom lines? Avis needs to buy more cars to make up for the volume spike from Hertz' reduction, keeping aggregate sales constant relative to a no-bankruptcy scenario.
- mark-r 6y ago
  I think the argument is that rental business is down all over, not just at Hertz. Even if all the Hertz business goes to their competitors, the demand for new rental cars will be way down this year.

Shivetya 6y ago

there has been a lot of talk about COVID19 leading to an implosion of used car values, this is affecting big automakers who have large lease portfolios, Ford and GM each are well past twenty billion here so I expect Hertz cannot be helped by this pressure

iso1631 6y ago
> there has been a lot of talk about COVID19 leading to an implosion of used car values I don't get that. Surely people still need to travel, and are less likely to take public transport, wouldn't that drive up demand rather than drive down? OK people might not be commuting 5 times a week, and perhaps doing fewer miles overall, but you'd still need a car. If you live in a walkable city, then your requirement for a car hasn't changed if you are no longer walking/subwaying to the office
- caseyohara 6y ago
  40 million people in the U.S. are unemployed right now and are not likely to buy a new car.
  - iso1631 6y ago
    Hence buying a used car instead... My understanding with americans is that having a car is more essential than having a house
    - Talanes 6y ago
      Most people who need cars have cars, and are putting less wear on them right now.
    - xsmasher 6y ago
      Two working people may need two cars; two unemployed people need one or zero cars.
    - perl4ever 6y ago

aj7 6y ago

The airline industry has a similar model.

airstrike 6y ago
Fortunately, there is no Uber for airlines, making them much less susceptible to the kind of secular trends Hertz was facing pre-COVID-19.

baddox 6y ago

> But breathlessly calling out the headline debt number without acknowledging that vehicle debt is a reasonable strategy for a rental car company is misleading at best. Shouldn't the conclusion be that it isn't a reasonable strategy if it causes the company to fail after a couple of months of significantly reduced demand? This global situation is awful, but it's far from unforeseeable.

abakker 6y ago
Why should companies plan to weather this kind of thing? Honestly, holding huge amounts of savings is a suboptimal deployment of capital virtually 100% of the time.
- baddox 6y ago
  Huge amounts of savings? It has only been a few months, and surely that would be considered an extremely tiny runway for a large national or international corporation. But sure, if government bailout money is there for the taking, obviously many large companies won't plan for it.

monadic2 6y ago

> Obviously it becomes a problem when rental income disappears at the same time depreciation increases because of a depressed used car market. Hertz clearly didn’t plan for that. But breathlessly calling out the headline debt number without acknowledging that vehicle debt is a reasonable strategy for a rental car company is misleading at best. This seems contradictory—if it can’t survive in an emergency, it doesn’t seem like a reasonable strategy.

phkahler 6y ago

>> They finance new cars, rent them out for a while, then dispose of them. That all works fine and vehicle debt is not a problem when rental income covers the interest+depreciation on the vehicles. Financing anything is ok until something goes wrong. The problem is that too many people and companies are living paycheck to paycheck. God forbid a company hold enough cash to finance their own operations - no that needs find it's way to the shareholders. A recent headline at CNN said the next problem for the economy was people saving money during the crisis or even paying down debt. SMH.

danesparza 6y ago

There are MANY other car rental companies that are not declaring bankruptcy, as far as I know. I was curious to know why Hertz was one of the first -- and I feel this article did a good job of pointing out that it was largely because of Carl Icahn. (Was I the only who actually said, "Aaaaah ... ok then" when I read his name?)