The Chapter 11 bankruptcy filing of Hertz Corporation and its US and Canadian subsidiaries Hertz, Dollar, Thrifty, Firefly, Hertz Car Sales, and Donlen β but not its subsidiaries in Europe, Australia, and New Zealand β on Friday May 22 threatens to make a royal mess of used-vehicle wholesale prices, as creditors may take possession of their collateral and dump hundreds of thousands of vehicles on the wholesale market starting in late July, pushing down wholesale prices further and creating further valuation pressures and bigger losses for Hertz creditors, the entire rental car industry, and leasing companies that also have to dispose of their vehicles.
This is the scenario the industry has been dreading for the past 10 weeks or so, when the distant likelihood of a Hertz bankruptcy suddenly became front and center. Hertz has already laid off about 20, people, or about half of its global workforce, it said in its bankruptcy press release. On April 29, Hertz disclosed that it had missed a lease payment on part of its fleet. And this is where it gets interesting, in terms of financial engineering and corporate complexity. Program vehicles are purchased from automakers under repurchase or guaranteed depreciation programs, where automakers agree to repurchase the vehicles at a set price; or they guarantee the depreciation rate until the vehicle is repurchased or sold at auction.
These program cars are more expensive for Hertz. These special-purpose subsidiaries are not part of the bankruptcy filing. The , vehicles are the collateral.
On April 29, Hertz announced that it missed making the payment on its vehicle operating lease to its special-purpose subsidiary. Thus, the cash flow to the special-purpose subsidiary collapsed, which then cannot pay the holders of the ABS. The ABS holders now have a right to foreclose on the vehicles and sell them at auction. But they have to wait for 60 days. So this scenario would commence toward the end of July. Hertz will likely try to work out a deal to where only part of the fleet is liquidated that would downsize the fleet to a large extent, but leave enough vehicles in the fleet to meet the collapsed travel demand.
But working out a deal with these disparate holders of those ABS is going to be complicated β if it can be done at all. If no deal can be worked out, the ABS holders can liquidate all , vehicles. If a deal can be worked out, they might liquidate only part of that. And they know that too. When those vehicles are suddenly being run through the auctions starting in late July, they will put downward pressure on wholesale prices, further increasing the losses.
