Hertz bankrupt

Discussion in 'The Water Cooler' started by TheOriginalHappyGoat, May 23, 2020 at 12:26 AM.

  1. TheOriginalHappyGoat

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    For you financial gurus here, how do you measure how ridiculous a company's debt load is? Hertz is carrying $19B in debt versus $21B in assets and $10B in (pre-Covid) annual revenue. That just seems preposterous to me.
     
  2. twenty02

    twenty02 Hall of Famer
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    It's obviously a hugely capital intensive business.... so large debt load would be normal. But those ratios indicate a company that was struggling pretty bad coming into this situation.
     
  3. twenty02

    twenty02 Hall of Famer
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    Looking at this.... it's kind of a complex deal. Hertz (and I guess most rental car firms) don't own the cars. They lease them from banks/ bond funds.... what sounds similar to me as other asset backed bonds, such as home mortgages. Banks buy the cars, lease them to Hertz, package all the collateral (cars) into bonds and sell them to investors.

    Somehow these were still rated AAA bonds
     
  4. TheOriginalHappyGoat

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    Jesus, that's complicated. So all of Hertz's $21B in assets are, what, office furniture?
     
  5. twenty02

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    Capitalized leases, I imagine.
     
  6. TheOriginalHappyGoat

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    This is why I asked for opinions from others, because I don't quite understand a lot of this, but that sounds rather...ephemeral...to me. Like the assets aren't really assets at all, just hopes and dreams turned into ledger entries.
     
  7. twenty02

    twenty02 Hall of Famer
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    From an accounting perspective, an asset is any resource that can be expected to generate future revenue for a business. As such, it's recorded as an asset, and the lease obligation payment as a liability.

    Just because you don't have the actual title to the property, you have a legal use of it .... in this case to rent the cars out for revenue.
     
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  8. 82hoosier

    82hoosier All-American
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    I know nothing about how Hertz gets their cars but I guarantee that banks do no not buy cars to lease.
     
  9. TheOriginalHappyGoat

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    That makes sense. From a legal perspective, I get it, and I I'm no accountant, but from my meager experience, I get it on that front, too. But it still doesn't seem like the sort of asset you should feel comfortable putting up as collateral on a nearly 1:1 basis.
     
  10. twenty02

    twenty02 Hall of Famer
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    I've never looked into the industry... but seems it is all just a system of we lease for X, we rent for Y. And we try to capture the spread of Y>X.

    Works fine, until Y wall falls through the floor.

    Investors buy ABS bonds promising X.. some likely low level of return.... and if they don't pay, then they can foreclose and take the cars.
     
  11. TheOriginalHappyGoat

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    So it's another one of those business models that's built on the assumption that business will always be there.

    I'm sorry, I really shouldn't judge things I know nothing about, but after helping shepherd a restaurant through the Great Recession, I find that kind of hubris to be off-putting, to say the least. I'm no longer with that business, but it's - well, not thriving, thanks to Covid - but surviving right now, and that's in no small part thanks to the long-term thinking we put into action when times were lean.
     
  12. twenty02

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    Not directly. But they are the owners of the ABS bonds. So they are the ones that matter
     
  13. twenty02

    twenty02 Hall of Famer
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    Yeah but in what's basically a structured finance business, like renting cars, if you don't do it.... your competitors will. And leave you sucking wind and losing. Hertz seemed to have already been failing, but no capital heavy business can sustain a 70+% drop off in revenue.

    For a comparison.... it appears that most every single downtown Indy hotel operator will be facing debt default in coming months. You can't operate a hotel at 10% occupancy. And certainly can't make your debt payments..... no matter how conservative you were in your business plan. And running a hotel without using leverage in normal times, is an unappealing return.
     
  14. TheOriginalHappyGoat

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    I guess you're right (obviously), but the thing is this: if you have a successful business, it's perfectly possible to run it with very little debt. You might not be able to expand as fast as you'd like, but you can survive.

    I'm not saying taking a conservative approach is always the right choice, but you have to have some kind of eye for "worst case scenario," don't you? Not that anyone could predict Covid, but I'm just saying, I'm seeing some businesses surviving right now, no problem. Losing money for the moment, to be sure, but expecting to come out of this on good footing, and ready to eat up the vacuum left behind by businesses that weren't as careful.
     
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  15. twenty02

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    Yeah, as it should be. That's the nature of capitalism. Some firms will be conservative.... and lag performance wise when times are good, compared with their heavily geared peers.

    When things go south, it flips.

    Leverage makes you look like a genius in good times, like a fool in bad.
     
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  16. TheOriginalHappyGoat

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    I'm already noting when I drive around which restaurants are going to be replaced by whom. You all are going to be surprised by which chains are expanding like crazy about 12 months from now, and which ones you'll never see again.
     
  17. i'vegotwinners

    i'vegotwinners All-American
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    where are you getting his?

    ----------------------------------------------------------------

    what i found,


    "As a general rule, rental car companies buy a large portion of their vehicles subject to repurchase or depreciation programs with the vehicle manufacturers. Under these programs, manufacturers agree to repurchase the vehicles at a specific time and/or price in the future, subject to certain conditions, or to guarantee the depreciation rate on the cars throughout the holding period.


    In 2011, nearly half of cars sold by Avis and a quarter of Hertz's were so-called "program" cars subject to such agreements. Dollar Thrifty, the smallest of the three, nearly never uses this option, choosing instead to rely principally on the used car market to dispose of its used vehicles. And data for Enterprise, because it's a private company, isn't available.



    Rental car companies also have the option of selling used vehicles to wholesalers, who then sell them to used car retail outlets, or directly to used car customers themselves. Last year, for example, Hertz sold approximately 65% of its non-program vehicles at auction, 19% directly to dealers, 9% through their own Rent2Buy program or at retail locations, and approximately 7% through other channels".

    https://www.fool.com/investing/gene...sing-facts-about-the-rental-car-industry.aspx


    even presuming the purchases were financed by the banks and the loans bundled as collateralized securities, that still wouldn't equate to what you're saying as i see it.

    i claim no expertise though, and will welcome correction on the matter.
     
    17 i'vegotwinners, May 23, 2020 at 5:27 AM
    Last edited: May 23, 2020 at 5:35 AM
  18. twenty02

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    Bonds backed by Hertz Global Holdings Inc.’s fleet of rental cars had the same credit rating as the U.S. government just a few weeks ago. Now the company’s financial woes are stoking fears that investors are headed for a loss.

    The rental-car company missed debt-related payments last month and a deadline on negotiations with lenders and bondholders is set to expire Friday. The two sides are still far from a deal, people familiar with the matter said, increasing the likelihood that the company will file for bankruptcy court protection.

    The restructuring is expected to trigger at least a partial liquidation of the Hertz rental-car fleet, the second largest in the U.S. behind rival Enterprise Holdings Inc.

    Hertz doesn’t own the cars. It essentially leases them from banks and bond funds that bought asset-backed bonds and loans used to purchase the vehicles. The company initially asked holders of some of its $14 billion in asset-backed debt to accept an indefinite delay in payments, an offer they rejected, people familiar with the matter said.
     
  19. Marvin the Martian

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    Would it be fair to think if those cars get sold off, the used car market will flood. Because a lot of them are very low mileage, the new car market will be greatly impacted.
     
  20. Courtsensetwo

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    Welcome to the black art of financial business accounting.

    A pandemic or widespread war on US soil are two of the only things that shut all that rolling inventory down. The numbers work otherwise.
     
  21. CO. Hoosier

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    I think the car company captive finance arms carry most of the paper.

    ought to be some good car deals as Hertz and others downsize their fleets.

    The liabilities will include the outrageous airport rental and fees. . Airports are already hurting. This thing has a lot of dominoes falling in many directions. Fauci finally said we need to accept the risk and open things up.
     
  22. TDHoosier

    TDHoosier All-American
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    --------------------------------------------------------------.

    ought to be some good car deals as Hertz and others downsize their fleets.

    The liabilities will include the outrageous airport rental and fees. . Airports are already hurting. This thing has a lot of dominoes falling in many directions. Fauci finally said we need to accept the risk and open things up.[/QUOTE]

    BK doesn't necessarily mean out of business. I would assume the banks would work with Hertz to make everyone happy. Unfortunately big work out deals like these happen.

    I would expect a liquidation process (you are right probably some good deals out there for a short bit)and then possibly an investor(s) coming in and trying to bail the company out if they believed the industry was strong enough and with better management Hertz could be profitable.

    Banks allow for loan loss and should have ample reserves, so they are typically in favor of any and all deals that drastically minimize their losses (they expect some losses although they don't like it).
     
  23. Morrison

    Morrison Senior
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    I’m listening. What’s your best guess on who survives and thrives versus who doesn’t make it?
     
  24. UncleMark

    UncleMark Hall of Famer
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    I don't know how you'd know by driving around, but I'd guess the ones in the best shape with their real estate situation are in the best position to survive and rebound.
     
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  25. TheOriginalHappyGoat

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    It's definitely helpful to own your own location. The two other biggest keys moving forward are going to be:

    1. Very little debt and decent cash reserves, as the transition back to profitability is going to take some time.
    2. Menu and price point that scales easily to carryout, because every restaurant that remains open is going to depend on carryout sales to get into the black. Carryout business is no longer an extra bonus to increase profits; it is essential.
     
  26. UncleMark

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    I was thinking those go together in many respects.
     
  27. TheOriginalHappyGoat

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    Well, there are some obvious ones. CraftWorks is already done for. I'm sure someone will come in and buy up the leftovers with an eye to maybe reviving some of the brands in the future, but for now, assume you will never eat in a Logan's again. This was one of the biggest losses to the industry. Almost over night, the company went from 18,000 employees to 25.

    Steak 'n Shake is also a goner. They were barely hanging on when this happened, and had already "temporarily" closed over 100 locations for various reasons. Many more than that will probably not reopen.

    It looks like Darden will survive, but not thrive. So you might see some Olive Gardens and Longhorns and Cheddars close. You certainly won't see them expanding to new locations any time soon.

    It's harder to come up with a list of brands that seem poised to thrive, but I can think of at least one, even though I'm not personally a fan: Cracker Barrel. Manageable debt, affordable menu that translates to carryout very well. In fact, I think the whole comfort food sector is going to grow. When people pick up a family-sized meal to take home and spread out on the table - and that is going to be a major part of the industry moving forward - they aren't usually looking for a giant box of New York strips. They are looking for country-fried steaks and macaroni-and-cheese.
     
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