Hertz thrashes out euro bond restructuring

Troubled US car-rental company Hertz said it is confident the restructuring for its European debt will go ahead, after submitting a new plan to the bankruptcy court on Tuesday.

While Europe and other international operations were not included in Chapter 11 proceedings, the Plan of Reorganization filed with the court in Delaware still provides for a « comprehensive restructuring » of the European business.

As part of the plan, which would see investment firms Knighthead Capital Management and Certares Opportunities investing US$4.2bn in return for a controlling stake in the reorganized Hertz, the company is offering European bondholders 70 cents on the dollar in cash – pari passu with Hertz’s US bondholders – for its outstanding euro bonds.

The remainder of the European claim – that is, 30% of the nominal value – would be restructured with new notes. The transaction will be implemented through a scheme of arrangement in the UK.

Hertz said that bondholders have already signaled « overwhelming support » to working out an agreement on its European debt.

However, there is still much to thrash out. On Thursday, the New York Post reported that Hertz’s unsecured lenders – a group which includes JP Morgan Asset Management, Fidelity, and Pentwater Capital – believe the plan puts too low a valuation on the company.

They’re considering an alternative to take the company public by converting their debt to stock and then listing the company through an IPO. However, as of Friday morning, the group hadn’t submitted a formal proposal. Both plans would have to be approved by a bankruptcy court.

New euro bonds

Hertz, which filed for bankruptcy last May with around US$19bn in debt, has two euro high-yield bonds: €225m 4.125% October 2021s and €500m 5.5% March 2023s, both issued via Hertz Holdings Netherlands (HHN).

Both bonds rallied after the announcement – the 2021s were bid at 86, up from 81, and the 2023s at 89.50, up from 81.

Under Hertz’s plan, those bonds would be paid down, or exchanged for new secured notes issued by HHN. Hertz is also planning to issue €250m in new senior secured bonds via parent company Hertz International to help fund the debt restructuring of its European business, according to court filings.

While the previous bonds were guaranteed by the US parent company, the new bonds wouldn’t carry that guarantee – but they will be secured, which compensates investors somewhat, said analysts.

« I see the treatment that investors are getting now and don’t think it’s bad for them, » said Mateo Salcedo, credit analyst at Spread Research.

« Hertz before the crisis was highly leveraged. Their recovery prospects were good – because of their assets – but when the crisis came they were not in a good position to face it. This restructuring programme will allow Hertz to return with a leaner structure. Before, they had a huge amount of debt but now they are looking to repay the fleet debt. Post-restructuring, the bondholders will have 70% of cash recovery and the new bonds, which are secured. »

Switching it up

A similar plan was put in place last year, when Hertz entered into a lock-up agreement with bondholders. That transaction, which also waived events of default by Hertz, was signed up to by the majority of the euro noteholders (54% of the 2021s and 56% of the 2024s).

In that plan, which was thrashed out at the end of last year and approved in January, Hertz said it would sell the guarantees of the notes to a third party and exchange the existing notes for new bonds that would be guaranteed by non-US affiliates.

But after Knighthead and Certares announced their intention to inject capital into the reorganized Hertz, the guarantees no longer need to be auctioned off.

« The only thing we’re not doing [from the previous plan] is separately bifurcating the guarantee claim and auctioning it, » said a lawyer familiar with the case. « There’s no new twists or turns. We’ve got a planned sponsor who will pay enough cash to pay unsecured creditors 70 cents on the dollar. »

A Hertz spokesperson told IFR that the company’s restructuring plan, which expressly confirms that the US parent will not be guaranteeing the European bonds, has already got approval from 99.8% of those bondholders who voted. The company said it is also finalizing terms for an extension with its banks in the UK and Europe.

However, bankers familiar with the European restructuring said that while the new section on Europe isn’t very different from what was negotiated with and voted on by European bondholders, it is separate. It would therefore likely need to be voted on again.

« The commitments from the plan’s sponsors will help us to move forward in parallel in the US to complete the European restructuring, » said a Hertz spokesperson. « We hope to agree on the final elements of our restructuring and have the necessary approvals from the English court in the spring. »

Hertz’s business was wrecked by the coronavirus pandemic and talks with creditors failed to result in any relief.

The capital injection from Knighthead and Certares, on top of a new US$1bn first-lien financing, a US$1.5bn revolving credit facility, and a new asset-backed securitisation facility to finance Hertz’s US vehicle fleet, will provide the basis for the company to exit Chapter 11 in early-to-mid summer, the company said on Tuesday.

« We’re trying to delever the Hertz corporate level debt significantly, » said the lawyer familiar. « We’re going to go from having around US$5bn in corporate debt to around US$1bn, and we’re trying to restructure the US fleet financing ABS. Along the way, we’ve made the company more efficient, with cost cuttings. We think we can get to similar Ebitda levels going forward with far less revenue. »