Hertz Bondholders, Jilted in First Bankruptcy, Fear New Turmoil

(Bloomberg) — Hertz Corp. bondholders who are owed about $320 million in unpaid interest leftover from the company’s Covid-era bankruptcy, fear the car renter will delay paying them in the face of fresh financial turmoil, a lawyer said in federal court Friday.

Bondholders want to get paid as soon as possible. Hertz putting off payment forces the creditors to bear the risk that the company’s financial health will deteriorate further, said Mark T. Stancil, an attorney for the bondholders’ trustee.

“It would be highly inequitable for an unimpeded creditor to be holding unsecured risk on the eve of the potential of a second bankruptcy,” he said.

That said, the prices for more than $6 billion of Hertz’s debt show the company is not facing bankruptcy any time soon. The bonds are trading well above levels that typically hit companies on verge of seeking court protection. On Friday, its 4.625% bond due in 2026 gained the most in value compared to other junk debt, as of 2:40 p.m. New York time, according to price-reporting platform Trace.

“Mr. Stancil’s comments are not rooted in reality. This conjecture is inaccurate and unfounded as Hertz is sufficiently capitalized,” a spokesperson for Hertz said. “Just yesterday, Hertz raised $500 million in additional capital from the highest quality investors.”

Stancil, however, was referring to financial news reports about the company’s weak performance and its latest financial maneuvers. Hertz missed earnings expectations and issued junk bonds to help it pay off old debt that was coming due. S&P Global Ratings also said the company faced a downgrade over the next year if its performance doesn’t improve. 

Recently, a federal appeals court in Philadelphia sided with bondholders from the company’s 2020 bankruptcy, ruling that Hertz must pay them interest related to the case. While bondholders say they’re owed about $320 million in interest, the company vowed to appeal the court’s decision. 

Any appeal could take at least six months to resolve and during that time the bondholders are at risk if the company’s financial condition deteriorates further, Stancil said.

Hertz does not have to pay the bondholders until after all appeals, including one to the US Supreme Court, have run out, company attorney Jason N. Zakia said in court. In the meantime, the company and the bondholders should each be allowed to present their views on how to calculate the amount of interest Hertz owes under the appeals court ruling, he said. At the moment, it looks like the two sides are “tens of millions of dollars” apart, Zakia said.

“I’m sitting here with a judgment from the Third Circuit saying what they owe, and we are being forced to extend credit to them,” Stancil said.

The dispute over interest owed began after Hertz managed to raise enough money while in bankruptcy to repay all creditors in full and still hand stockholders more than $1 billion, an outcome considered extraordinary. In most big, Chapter 11 cases, creditors get far less than they are owed and shareholders get nothing.

Investors holding Hertz bonds due in 2026 and 2028 demanded a fee for being paid back early as part of the bankruptcy. After more than three years of litigation, the appeals court sided with bondholders. 

US Bankruptcy Judge Mary Walrath asked both sides to submit arguments about how to calculate the interest and whether Hertz should be forced to post a bond for what it owes should the company appeal.

The case is Rental Car Intermediate Holdings, 20-11247, US Bankruptcy Court District of Delaware (Wilmington)

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