Hertz: collateral damage
The US car rental company’s demise has ramifications for the broader auto industry
It isn’t until the tide goes out, investor Warren Buffett once quipped, that you see who was swimming naked. Hertz is the latest name in corporate America caught skinny dipping. The US car rental company filed for Chapter 11 bankruptcy late on Friday night after the coronavirus pandemic crippled global travel and with it, demand for Hertz vehicles.
It would be easy to dismiss Hertz as just another victim of the pandemic. That is only part of the story. The company, which also owns the Dollar and Thrifty brands, was struggling long before Covid-19.
Last year Hertz made a net loss of $58m despite raking in nearly $10bn in revenue. Rivals Enterprise and Avis Budget have been hard hit by the pandemic too. But Hertz — hobbled by $24.4bn of borrowings — was the most vulnerable. Its collapse is the culmination of years of crushing debt and strategic mis-steps.
Hertz flaunts a full set of self-inflicted injuries. First comes the ill-fated $2.3bn acquisition of budget rival Dollar Thrifty in 2012. Second, Hertz was slow to respond to the rise of ride-hailing companies such as Uber and Lyft. Third, management upheaval — four chief executives in six years — has plagued the business.
Fourth, and most importantly, Hertz opted to own a large portion of its fleet outright rather than through “buyback” agreements with carmakers. This was its undoing.
In normal times, Hertz would simply sell off excessive vehicles when demand dropped in order to drum up cash and pay creditors. But prices for used cars have slumped as car dealerships and other rental car companies rushed to sell their inventory. Since Hertz financed most of its fleet with asset-backed debt, the drop in value of the asset means lenders can force it to stump up more cash as collateral.
Hertz’s demise has ramifications for the broader auto industry. The company has already cancelled most new car orders. It risks pouring yet more supply into the moribund used car market. There is a chance that demand for automobiles will rally thanks to prolonged social distancing. If so, it will come too late to help Hertz.