Hertz Approved to Offer Potentially Worthless Stock

The court’s proceeding was in favor of Hertz Global Holdings Inc. to carry on with its plan to raise cash by selling shares that are potentially worthless. The Friday court bankruptcy hearing was ruled by Judge Mary Walrath.

Hertz will be allowed to proceed with bankruptcy and sell new shares at the same time.

The car-rental company said the offering could raise as much as $1 billion in cash. Its plan to sell shares that could end up worthless would place the company at an advantage which would help it settle the massive debts that pushed it into bankruptcy.

‘What do investors stand to gain or lose?’

It is not a hidden fact that buying stock in bankrupt companies is a huge risk to take, especially when there is a good chance of the stock becoming worthless. Investors who decide to go ahead with buying stock of bankrupt companies must know that there are set rules that guide returns and dividend payments. These rules require that all creditors must be fully repaid before shareholders get paid.

On its part, Hertz has assured its buyers that it would keep them alert about the potential wipe-out. By doing so, buying the company shares would totally be at the buyer’s risk without implicating the company in any way. The company didn’t fail to mention to the Delaware court that it would warn buyers that “the common stock could ultimately be worthless.” In relation to the Hertz bankruptcy stock sales, former bankruptcy judge Melaine Cyganowski said if buyers would still like to proceed with buying Hertz’s stock then it is completely up to them.

“They’ve all been given the warnings. If people want to buy it, fine,” she said.

Whether or not Hertz shares would eventually become worthless isn’t known fully, according to Walrath in a Zoom hearing with over 200 people in attendance. She said, as a matter of fact, that it wasn’t “clear where the fulcrum security is and what enterprise value” of the company will be. One thing that is certain, however, selling stock would be a way for the company to settle outstanding debts.

According to Hertz's attorney, Tom Lauria the company plans to begin the sale as soon as possible before the opportunity skips past them. In his words, the company is trying to “move very swiftly.”

Hertz stock price has fallen to really low levels since the start of the pandemic. Between May 26 and Monday, the company’s stock jumped to $5.53 from 56 cents. It, however, fell to $2.60 in late New York trading after the court bankruptcy ruling.

‘What are creditors saying?’

Some of Hertz’s unsecured creditors have expressed their approval of the offering, saying that it could raise about $500 million for the company. The cash infusion would also mean that the company will not have to pay any of the high-interest rates associated with taking traditional bankruptcy loans.