Hertz Says Survival Tied to Reducing Fleet to Fit New Normal

Hertz must figure out how many of the 730,000 autos it controls to keep and how much debt that fleet can support.

Hertz Says Survival Tied to Reducing Fleet to Fit New Normal
A row of rental cars are parked below a sign for Hertz Corp. at Denver International Airport, U.S. (Photographer: Matthew Staver/Bloomberg)

(Bloomberg) -- Hertz Corp. will sell as many of its rental cars as possible while in bankruptcy to bring its huge fleet in line with reduced future demand in a post-pandemic economy, the company’s lead bankruptcy lawyer said during a court hearing Wednesday.

The company must figure out how many of the 730,000 autos it controls to keep and how much debt that fleet can support, bankruptcy attorney Thomas Lauria said during a court hearing conducted by video and telephone. When the Covid-19 pandemic hit, all the prediction models the company uses to run its business failed, Lauria said.

“We don’t know when people will be free to move around or when people will return to traditional travel patterns and what the new normal will look like,” Lauria told U.S. Bankruptcy Judge Mary Walrath. “The value of the business is uncertain and its capacity to service the debt is less than uncertain -- right now, it’s effectively nil.”

Hertz will use the next 60 days in bankruptcy to negotiate with creditors, including those whose debt is tied to the value of the vehicle fleet, Lauria said. The company may be forced to make lease payments on the vehicle fleet after that if negotiations fail, Lauria said.

Holders of bonds backed by Hertz’s fleet said in court papers that if nothing changes, those payments will hit $1 billion, mostly to compensate them for a loss in the value of the cars. During the hearing lawyers for the vehicle bondholders complained that Hertz is trying to use the cars without paying for them, which imposes losses on the bondholders.

Bondholders Balk

The company filed bankruptcy on May 22 without any agreements with bondholders or detailed reorganization strategy.

Vehicle bondholders accused Hertz of trying to ride out the Covid-19 crisis in bankruptcy “by relying on cash on hand and a hope that demand for rental cars will improve.” Those creditors, known as the VFN noteholders, are owed about $10.9 billion.

That strategy “comes at massive and disproportionate risk to the VFN noteholders, who, after funding the purchase of the entire rental fleet, have been asked to sit idly by as the value of that rental fleet declines,” the bondholders said in the court papers.

Most of the company’s $19 billion in debt is tied to the vehicle fleet, which Hertz leases from its subsidiary, Hertz Vehicle Financing LLC, a special-purpose company created to issue debt and pay for the cars. Hertz Vehicle pays the VFN noteholders in part based on how much value the fleet loses over time.

When Hertz fails to make lease payments to its subsidiary, which is not in bankruptcy, the bondholders suffer.

Walrath gave Hertz interim approval to take a number of routine actions needed to keep operating while in bankruptcy, including permission to pay workers, various critical suppliers using cash from about $883 million the company held when it filed for court protection.

The judge also approved limits on trading in the company’s stock in order to protect tax benefits related to about $9 billion worth of net operating losses. If the company changes ownership, Hertz could lose the ability to use those losses to offset taxes on future profits.

The case is The Hertz Corp. 20-11218, U.S. Bankruptcy Court, District of Delaware (Wilmington)

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