Hertz Global Holdings, Inc. (NYSE: HTZ) and certain of its U.S. and Canadian subsidiaries have filed voluntary petitions for reorganization under Chapter 11 in the U.S. Bankruptcy Court for the District of Delaware.
The impact of COVID-19 on travel demand was sudden and dramatic, causing an abrupt decline in the Company’s revenue and future bookings. Hertz took immediate actions to prioritize the health and safety of employees and customers, eliminate all non-essential spending and preserve liquidity. However, uncertainty remains as to when revenue will return and when the used-car market will fully re-open for sales, which necessitated [Fri]day’s action. The financial reorganization will provide Hertz a path toward a more robust financial structure that best positions the Company for the future as it navigates what could be a prolonged travel and overall global economic recovery.
Hertz’s principal international operating regions including Europe, Australia and New Zealand are not included in [Fri]day’s U.S. Chapter 11 proceedings. In addition, Hertz’s franchised locations, which are not owned by the Company, also are not included in the Chapter 11 proceedings.
All Hertz Businesses Remain Open and Serving Customers
All of Hertz’s businesses globally, including its Hertz, Dollar, Thrifty, Firefly, Hertz Car Sales, and Donlen subsidiaries, are open and serving customers. All reservations, promotional offers, vouchers, and customer and loyalty programs, including rewards points, are expected to continue as usual. Customers can count on the same high level of service and reliability, including new initiatives such as “Hertz Gold Standard Clean” sanitization protocols to provide additional safety in response to the COVID-19 pandemic.
“Hertz has over a century of industry leadership and we entered 2020 with strong revenue and earnings momentum,” said Hertz President and CEO Paul Stone. “With the severity of the COVID-19 impact on our business, and the uncertainty of when travel and the economy will rebound, we need to take further steps to weather a potentially prolonged recovery. [Fri]day’s action will protect the value of our business, allow us to continue our operations and serve our customers, and provide the time to put in place a new, stronger financial foundation to move successfully through this pandemic and to better position us for the future. Our loyal customers have made us one of the world’s most iconic brands, and we look forward to serving them now and on their future journeys.”
First Day Motions
As part of the reorganization process, the Company will file customary “First Day” motions, which should allow it to maintain operations in the ordinary course. Hertz intends to continue to provide the same vehicle quality and selection; to pay vendors and suppliers under customary terms for goods and services received on or after the filing date; to pay its employees in the usual manner and to continue without disruption their primary benefits; and to continue the Company’s customer loyalty programs.
Sufficient Cash to Support Operations
As of the filing date, the Company had more than $1 billion in cash on hand to support its ongoing operations. Depending upon the length of the COVID-19 induced crisis and its impact on revenue, the Company may seek access to additional cash, including through new borrowings, as the reorganization progresses.
Strong Upward Trajectory
Hertz was on a strong upward financial trajectory prior to the COVID-19 pandemic, including ten consecutive quarters of year-over-year revenue growth and nine quarters of year-over-year adjusted corporate EBITDA improvement. In January and February 2020, the Company increased global revenue 6% and 8% year over year, respectively, driven by higher U.S. car rental revenue. In addition, the Company was recognized as No. #1 in customer satisfaction by J.D. Power and as one of the World’s Most Ethical Companies by Ethisphere.
Taking Actions in Response to COVID-19
When the effects of the crisis began to manifest in March, causing an increase in car rental cancellations and a decline in forward bookings, the Company moved quickly to adjust. Hertz took action to align expenses with significantly lower demand levels by closely managing overhead and operating costs, including:
— reducing planned fleet levels through vehicle sales and by canceling fleet orders,
— consolidating off-airport rental locations,
— deferring capital expenditures and cutting marketing spend, and
— implementing furloughs and layoffs of 20,000 employees, or approximately 50% of its global workforce.
The Company actively engaged with many of its largest creditors to temporarily reduce the required payments under the Company’s vehicle operating lease. Although Hertz negotiated short-term relief with such creditors, it was unable to secure longer-term agreements. Additionally, the Company sought assistance from the U.S. government, but access to funding for the rental car industry did not become available.
White & Case LLP is serving as legal advisor, Moelis & Co. is serving as investment banker, and FTI Consulting is serving as financial advisor.
Additional information for customers regarding Hertz’s restructuring is available www.hertz.com/drivingforward. Court filings and information about the claims process for suppliers and vendors are available at https://restructuring.primeclerk.com/hertz, by calling the Company’s claims agent at (877) 428-4661 (toll-free in the U.S.) or (929) 955-3421 (for parties outside the U.S.) or emailing email@example.com.
Road to Bankruptcy
Last month, Hertz engaged in discussions with various creditors to obtain relief from its obligations to make full rent payments under its operating lease, under which the company leases vehicles used in its U.S. rental car operations. While those talks were ongoing, on April 27, 2020, Hertz skipped certain payments in accordance with the operating lease to preserve liquidity.
Hertz at that time warned that there was substantial doubt regarding its ability to continue as a going concern. “Management has determined that the Company may not be able to repay or refinance its debt facilities prior to their respective maturities and may not have sufficient cash flows from operations or liquidity to sustain its operating needs or to meet the Company’s obligations as they become due” over the next 12 months, the Company said in its quarterly report on Form 10-Q for the three months ended March 31, 2020, filed earlier this month.
In March 2020, the World Health Organization declared a pandemic resulting from the COVID-19 viral disease (“COVID-19″). In response to COVID-19, local and national governments around the world instituted shelter-in-place and similar orders and travel restrictions, and airline travel decreased suddenly and dramatically. Despite a strong start to the year, as a result of the impact on travel demand, late in the first quarter, the Company began experiencing a high level of rental cancellations and a significant decline in forward bookings. In response, during a time in which the Company would normally be increasing its fleet for the peak summer season, the Company sought to adjust its fleet level to reflect the reduced level of demand by leveraging its multiple used-vehicle channels and negotiating with suppliers to reduce fleet commitments. The Company expects a material reduction in commitments to purchase vehicles with approximately a $4.0 billion reduction from original commitments in its U.S. rental car segment during the remainder of 2020.
The Company disclosed it began aggressively managing costs, including the implementation of employee furlough programs affecting approximately 20,000 employees worldwide to align staffing levels with the slowdown in demand, actively negotiating to abate or defer its airport rent and concession payments, substantially reducing capital expenditures and eliminating discretionary marketing spend. Also, the Company borrowed substantially all available funds under its senior revolving credit facility to ensure access to its committed liquidity under the Senior RCF. As of March 31, 2020, the Company had $595 million of principal outstanding under its Senior RCF and $748 million in outstanding standby letters of credit. As of March 31, 2020, the Company’s unrestricted cash and cash equivalents balance was approximately $1.0 billion.
In April 2020, as a result of the continued impact from COVID-19, the Company initiated a restructuring program affecting approximately 10,000 employees in its U.S. RAC segment and U.S. corporate operations, the majority of which were previously furloughed, and expects to incur approximately $30 million of severance and healthcare-related charges to be paid over the next twelve months.
Although the Company has taken aggressive action to eliminate costs, it faces significant ongoing expenses, including monthly payments under its Amended and Restated Master Motor Vehicle Operating Lease and Servicing Agreement (Series 2013-G1) with Hertz Vehicle Financing LLC (“HVF”), pursuant to which Hertz leases from HVF vehicles used in Hertz’s U.S. rental car operations. Hertz Vehicle Financing II LP (“HVF II”), a special purpose financing subsidiary, issues asset-backed notes and lends the proceeds thereof to HVF to finance the acquisition of vehicles, which are then leased to Hertz pursuant to the Operating Lease. Monthly payments under the operating lease are variable and significant and have increased because declining vehicle values resulting from a disrupted used-vehicle market require Hertz to make additional payments to offset such value declines in order to continue using the vehicles. During April 2020, the Company engaged in discussions with various creditors to obtain relief from its obligations to make full rent payments under its Operating Lease. While such discussions were ongoing, to preserve liquidity, on April 27, 2020, Hertz did not make certain payments in accordance with the Operating Lease.
As a result of the failure to make the full rent payments on April 27th, as of May 5, 2020 an amortization event was in effect for all series of notes issued by HVF II and a liquidation event was in effect with respect to the variable funding notes issued by HVF II. As a result of the amortization event, and notwithstanding a forbearance agreement, proceeds of the sales of vehicles that collateralize the notes issued by HVF II must be applied to the payment of principal and interest under those notes and will not be available to finance new vehicle acquisitions for Hertz. However, in light of the impact of the COVID-19 global pandemic on the travel industry, Hertz believes it will not need to acquire new vehicles for its fleet through the remainder of 2020. A liquidation event means that, unless the affected noteholders otherwise agree, the affected noteholders can direct the liquidation of vehicles serving as collateral for their notes.
On May 4, 2020, prior to the occurrence of the liquidation event with respect to the Series 2013-A Notes, Hertz, HVF, HVF II and DTG Operations, Inc. entered into a forbearance agreement with holders — VFN Noteholders — of the Series 2013-A Notes representing approximately 77% in aggregate principal amount of the Series 2013-A Notes. Pursuant to the Forbearance Agreement that is effective against all VFN Noteholders, the VFN Noteholders agreed to forbear from exercising their liquidation remedy. The agreement with the VFN Noteholders is set to expire on May 22, 2020 or, if sooner, the date on which Hertz fails to comply with certain agreements contained in the Forbearance Agreement or any other amortization event occurs under HVF II’s financing documents.
Concurrently with entering into the Forbearance Agreement, on May 4, 2020, Hertz entered into limited waiver agreements with certain of the lenders under its (i) Senior RCF/senior term loan facility, (ii) letter of credit facility, (iii) alternative letter of credit facility and (iv) U.S. Vehicle RCF. Pursuant to the Waiver Agreements, the Lenders agreed to (a) waive any default or event of default that could have resulted from the missed payment under the Operating Lease, (b) waive any default or event of default that has arisen as a result of Hertz’s failure to deliver its 2020 operating budget on a timely basis in accordance with the Facilities and (c) extend the grace period to cure a default with respect to Hertz’s obligation to reimburse drawings that occur under certain letters of credit during the waiver period. The Waiver Agreements were effective across the Facilities and set to expire on May 22, 2020 or, if sooner, the date on which Hertz fails to comply with certain agreements contained in the Waiver Agreements, which include certain limitations on the Company’s ability to incur corporate indebtedness and to make certain restricted payments, investments and prepayments of indebtedness during the waiver period and a requirement to deliver certain financial information to the Lenders during the waiver period.
In accordance with the Forbearance Agreement and the Waiver Agreements, the Company made a payment of approximately $30 million reflecting certain variable payment elements of monthly rent under the Operating Lease, including an interest component.
Effective May 16, 2020, Kathryn V. Marinello resigned from her position as President and Chief Executive Officer of Hertz Global Holdings, Inc. and The Hertz Corporation, and from any office at any affiliated entity of the Company and resigned as a member of the Company;s Board of Directors. In her place, the Board appointed Paul E. Stone, the Company’s Executive Vice President and Chief Retail Operations Officer North America, to serve as President and CEO, and as a Director on the Board.
Hertz had $25.8 billion in total assets and $24.3 billion in total liabilities, including $18.4 billion in total debts, according to its quarterly report for the period ended March 31, 2020.
The Company posted wider net loss of $357 million for the first quarter of 2020, from a net loss of $148 million for the same period last year.
Hertz Holdings, a holding company for Rental Car Intermediate Holdings, LLC, is engaged in the vehicle rental and leasing business. The Company operates its vehicle rental business globally primarily through the Hertz, Dollar and Thrifty brands from approximately 12,400 corporate and franchisee locations in North America, Europe, Latin America, Africa, Asia, Australia, the Caribbean, the Middle East, and New Zealand.
Hertz reported a net loss attributable to the company of $58 million for the year ended Dec. 31, 2019, compared to a net loss attributable to the company of $225 million for the year ended Dec. 31, 2018.