Rental car franchise Hertz has announced that thanks to a last-minute reprieve from lenders, the company has narrowly avoided filing for bankruptcy as collapses in the travel and aviation industries hit its bottom line extremely hard.
Earlier this week there were reports circulating that Hertz, which is backed by US billionaire, Carl Icahn, was preparing a ‘fire-sale’ in anticipation of filing for bankruptcy after racking up $17 billion in debt, with the company’s shares falling as much as 36%.
Now, however, we’ve learned details of an eleventh-hour deal Hertz secured with its lenders to extend payment of debts by a few weeks. Hertz missed a previous April deadline to lenders, primarily the leasing cost for its fleet’s vehicles. An extension was granted to May 4th, and a day later, Hertz had reached a deal to extend this once again to May 22nd.
Hertz last month moved to cut 10,000 jobs - more than 25% of its US workforce after profound drops in the number of people travelling amid pandemic measures and lockdowns. Chief Executive Officer Kathryn Marinello said the company deployed all possible measures to avoid filing for bankruptcy.
Details of the deal have come as one of Hertz’ main competitors, Avis Budget Group Inc posted a net loss of $158 million for the first quarter of 2020, announcing that its sales had fallen 9% to $1.8 billion. Avis estimates that its revenues for April and May will drop 80%.
Hertz said in a statement issued to the Securities and Exchange Commission that it was hoping to “develop a financing strategy and structure that better reflects the economic impact” of the COVID-19 pandemic. Hertz has suffered “a rapid, sudden and dramatic negative impact” to its core business model in the wake of the pandemic.
According to anonymous sources close to the company, Hertz was preparing to file for Chapter 11 court protections before a credit extension was secured.
Last year, Hertz posted record-setting revenue numbers, but the company remained running at a loss after recording a net loss of $58 million, which was down from $225 million in 2018. The company has pleaded with the US Government to allow rental car companies to take part in the $50 billion bailout plan for airlines, which the industry is inextricably linked to.
The Treasury Department has said, however, that under its larger $2.2 trillion CARES Act, the government is only able to support passenger and cargo air carriers, contractors and companies that are essential in contributing to national security.
The filing added that the company would not be expanding its fleet of vehicles this year, and according to Cox Automotive’s data, sales of U.S. rental cars have dropped by 77% in April. Hertz has told its investors that it expects sales to continue to fall until at least June, adding that this is extremely dependent on the recovery of the airline and tourism industries.
According to a report from the Financial Times, rental car companies rely on airports for around two-thirds of their profits. That report also notes that “the business models of US operators are also heavily exposed to changes in used-car prices, because the companies own the vehicles and have to account for their depreciation.”
“A faster than expected fall in used-car prices forces rental groups to put up cash at the end of each quarter in additional collateral, something that threatens to sap the liquidity across the sector,” they added.
Jim Cain, a spokesman for General Motors, has said his company, like many others, would be taking back units, sending them to dealerships instead because of the fact that there is “virtually no business” in the fleet industry; around 80% of fleet vehicles typically go to rental companies.
Bob Carter, executive vice president of sales at Toyota’s North American division added that “as we transition to people not traveling, the rental-car demand dropped precipitously.”