Most of it, at least.
Originally published at TK on June 20, 2020.
As we discussed just a few days ago, Hertz, the now-bankrupt car rental company, was recently in talks to sell roughly $1 billion worth of new (but ultimately worthless) stock. Luckily, the company came to its senses and stopped the whole thing due to concerns over moral hazards...
Just kidding. Hertz cut the offering in half, stating that they would sell only $500 million in (ultimately worthless) stock. However, there seems to remain a semblance of reason left in the Halls of Power because the SEC has stepped in to say that they have comments and concerns about the company's plans to sell bankrupt stock to (or perhaps more accurately: dump bankrupt stock on) retail investors. The average brand-new trader very likely doesn't understand that these instruments are fundamentally worthless for specific reasons.
SEC Chairman Jay Clayton stated that most companies, Hertz included, halt any prospective stock sales until the sellers can address the Commission's comments. In most cases, when the SEC informs a company that they have commented on their disclosure, it means that something is very likely in violation of the Commission's set rules and regulations regarding asset sales. The company made the following statement in their filing with the SEC:
"Although we cannot predict how our common stock will be treated under a plan, we expect that common stockholders would not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured and unsecured indebtedness (which is currently trading at a significant discount), are paid in full, which would require a significant and rapid and currently unanticipated improvement in business conditions to pre-COVID-19 or close to pre-COVID-19 levels."
The head of Hertz essentially says here that the company understands that there is virtually no way for retail investors who purchase the common stock to receive any benefit before the more senior debt is made whole. The only way they would find an actual return on value would be if the company facilitates its senior debt first (something we covered in our last segment). It is quite clear that the company doesn't believe they will be able to clear priority debts before they issue more common stock. They also, thankfully, cannot move forward with the sale until they resolve the SEC's comments regarding this issue.
Keep in mind that some senior debt holders purchased credit default swaps (CDS), which we explored in our previous article. Those that did receive a payout upon the default announcement were ultimately no worse the wear; after all, CDS is corporate bond insurance. Those investors secured their principal plus whatever interest they accumulated (less the cost of the CDS) at the time of default. This wise move is yet another example of how more seasoned investors (read: institutions) can beat retail traders in the long term. Sure, retail traders can make decent returns in the short-term if they buy into a bankrupt company's stock early and manage to sell to a greater fool. But this scenario means they have a much higher propensity for losing it all due to a lack of understanding of the instruments they're trading and shoddy fundamentals. With that said, who can blame the newbies when the Federal Reserve continues to support zombie companies and corporate assets with valuations that remain suspended in the free air. The Fed just announced they would purchase $250 billion in corporate bonds. The punch bowl is once again topped off! Time will tell how bad the hangover Hertz.