“No one ever loses equity in a bankruptcy case,” U.S. Bankruptcy Judge David Jones said during a status conference in the J.C. Penney case last month. “Equity gets lost long before the case is filed.”
Hertz filed Chapter 11 under the U.S. Bankruptcy Code after the market closed on May 22nd. The filing was well telegraphed. The next day the stock took a cliff dive down to 40 cents from the previous day’s close at $2.84. Below 50 cents is about where the stock of bankrupt company should trade, especially when the senior secured debt outstanding exceeds the value of a company’s assets.
But don’t tell that to the new breed of retail daytrader, who has rediscovered the “art” of chasing insanely overvalued stocks, most of which will eventually go out of business. Most if not all of the current batch of daytrading geniuses were not around during the dot.com boom/bust:
Away from hedge fund computer algorithms set up by market professionals to take advantage of High Frequency Trading technology (HFT), “day trading” and “call options” are the beacons of inexperienced retail traders who have very little understanding of the risks involved in trading the markets. The fact that large numbers of newly minted traders have searched on the term “call options” reflects their relative market ignorance. It’s been estimated that 90% of all retail daytraders were wiped out in the dot.com bust, which also took down Jim Cramer’s hedge fund.
Hertz has $15 billion of senior secured debt collateralized by its fleet and $4 billion unsecured subordinated debt. The book value of Hertz’s fleet is $14 billion. With the crash in used car prices, the fleet is likely worth 10-20% less – at least – than the value carried on the books. This means the subordinated debt and shares are worthless. The sub debt was trading at 40 cents on the dollar late last week. Yet Hertz’s stock traded close to $900 million market cap on June 8th.
In the best case, if Hertz re-organizes the secured debt will get 90% of the new equity and the sub debt will get 10%. The shares will be canceled and the shareholders will be tossed some gratuitous deep out of the money warrants. And yet, the market cap of the equity traded as high as $887 million this past Monday.
The worst case for Hertz is a liquidation, in which case the senior secured debt be paid out while the sub debt and equity are bageled. Even the lawyer for Hertz at the court hearing admitted that Hertz’s value had “disconnected from the fundamentals.”
The stock deal is an “at-the-market” offering, meaning the underwriter (Jefferies) will dump shares into the market when the Robinhood Einsteins bid the shares higher. The only hurdle preventing Jefferies from unloading as many shares as possible until the stock approaches zero is a provision that prevents shares under this offering from being sold below $1. Said provision can be changed easily with written consent from parties to the agreement.
Any funds raised will either be used to pay for Hertz’s legal and operating costs or it will be distributed to bondholders. This stock deal epitomizes the degree to which the stock market is completely corrupted.
I was not surprised the bankruptcy court judge and the SEC signed off on the deal. Once upon a time in America bankruptcy judges and the SEC did their job as public servants by looking after the interests of the public – in this case unsophisticated retail investors who didn’t have a brokerage account 6 months ago. But the three branches of Government in this country have morphed into a portal by which the wealthy and powerful elite are sucking as much wealth from the public as possible before the system collapses, while compensating politicians, judges and lawyers well for their help.
Hertz and its lawyers admit that the Hertz shares will more than likely end up worthless. Jefferies, the broker/agent for the sale of the shares, will receive 3% of the proceeds. Jefferies unsavory and corrupt nature dates back to the Drexel era, when Boyd Jefferies was nailed for colluding with Ivan Boesky for multiple SEC violations.
This entire stock bubble enabled by the Fed’s flood of printed money into the financial system is little more than a money transfer mechanism from the public to the Wall Street banks, corporate CEO’s, private equity funds and other sundry beneficiaries (unicorn founders/employees, law firms, lobbyists, etc).
Hertz reflects the degree to which entire U.S. economic and financial system has deteriorated into a free-for-all for the wolves – foaming at the mouth – who are in a position to take advantage of this environment. Note to Robinhood traders: that’s not you.
I said over 15 years ago that the Fed would eventually print enough money to enable the elitists to sweep every last crumb of the public’s money off the table into their own pockets before allowing the system to collapse. We may be on that final stretch – gradually then suddenly – where we are entering the “suddenly” moment…
“…when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you–when you see corruption being rewarded and honesty becoming a self-sacrifice–you may know that your society is doomed.” – Francisco’s “Money Speech,” “Atlas Shrugged.”