Breakingviews: Next Hertz drivers face a hairy ride

Hertz Global is gearing up for yet another set of drivers to take the wheel. Hedge funds Knighthead Capital Management and Certares Opportunities have made their pitch to tow the car-rental company’s U.S. business out of bankruptcy by leading an injection of up to $4.2 billion in equity. The plan also puts in place useful guardrails for what will be a hairy ride.

Before the pandemic forced it to seek Chapter 11 protection last May, Hertz had spent the past century being tinkered with by everyone from the airline and car industries to private equity and activist investors including Carl Icahn. The next wannabe owners have the right idea by restarting the company with just $1 billion in debt, less than a quarter of what it was carrying before the collapse. A $1.5 billion line of bank credit would provide an extra buffer. And the management team, which supports the proposal, reckons U.S. revenue could return to about 75% of its 2019 level by the end of this year, based on a compensation plan filed in January.

Using its mid-range estimate for the second half, the annualised top line could hit $5.1 billion. Suppose Hertz Chief Executive Paul Stone cranks out a 10% EBITDA margin, 3 percentage points better than in 2019. Pimp the enterprise’s ride with a multiple of 10 times EBITDA, compared with less than 8 times pre-pandemic, and the company would be worth some $5 billion after secured creditors are made whole and unsecured ones receive about 70 cents on the dollar.

Those financial assumptions may be optimistic, however, considering that the business model is under threat. Ride-sharing, whether from Uber Technologies and Lyft – worth a combined $120 billion – or hourly self-drive rentals such as Avis Budget-owned Zipcar, have steadily taken market share. That was causing Hertz to sputter even before Covid-19 struck.

It might help explain why the latest Hertz backers are leaving themselves wiggle room. They’ll contribute only $2.3 billion initially and the company should have a cash cushion, according to Breakingviews calculations using publicly disclosed figures. That means Knighthead and Certares will be paying less than the headline number suggests. They’ll need all the protections they can get.

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