When a company files for bankruptcy its shares usually fall. But last month when Hertz filed for bankruptcy it experienced something different. When Hertz filed for bankruptcy its shares did not fall. Instead, the rental car giant was selling even more shares.
An Unusual Request
Hertz asked a bankruptcy judge in a court filing if the company could sell its shares. The company asked to sell up to $1 billion in new stock as part of its chapter 11 reorganization. This was an extraordinary move by the company.
This request of Hertz was approved by Judge Mary Walrath, who is overseeing the Hertz bankruptcy court case in Delaware.
The company is creating hype as its shares rebound from the initial drop immediately after filing for bankruptcy.
Out of many companies, Hertz is also the one that is enjoying a post-bankruptcy bounce in its stock price. This is also a sign of how unpredictable the market has become in recent years.
In the court filing, Hertz said, “The situation presents a unique opportunity for the Debtors to raise capital on terms that are far superior to any debtor-in-possession financing.”
The company’s shares dropped by 80% to about 56 cents a share on May 26. But the stock of the company increased as high as $5.53 during Monday trade.
Shares closed shares finished the day up 37% to $2.83. The shares increased nearly by 50% in early Friday trading to around 3$ a share. This is slightly higher than the price Hertz was trading before it filed for Chapter 11.
Hertz was planning to sell about 246.8 million unissued shares with the help of investment bank Jefferies Group. The company mentioned this in the filing.
The company did this to show that by selling more shares, Hertz would not have to pay back to its debtors.
However, through more traditional forms of debtor-in-possession financing, most bankrupt companies take out loans backed by the firm’s assets. These actions help the company to gain back its position. But they are still new loans and need to be repaid.
Selling of Shares
But, selling shares of a company is an uncertain move. Issuing more shares to new investors can decrease the value of existing investors.
Shares of a bankrupt company typically lose value. If the company is issuing new stock there is no guarantee the prior shareholders will receive new shares.
Hertz said, “It would include disclosure in any prospectus used to offer common stock highlighting that an investment in Hertz’s common stock entails significant risks, including the risk that the common stock could ultimately be worthless.”
The Pandemic Effect
COVID-19 has affected the travel demand hugely, which has caused a sudden drop in the company’s profit. It has also affected the numbers of future bookings said the company in a statement.
It has been through difficult times before as well and survived through those times so, by filing bankruptcy, the company tried to modify the debts and come out as a financially stable company to stay in the business.