SEC Has Issues With Hertz

Just a few weeks ago, Hertz (NYSE:HTZ)—which has been in business for 102 years, filed for Chapter 11 bankruptcy as the coronavirus crippled demand for rental cars.

With nearly $20 billion in debt and $1 billion in cash, the company's former CEO said just a few weeks before the bankruptcy filing that "No business is built for zero revenue."

Despite the bankruptcy filing, which in normal times would be taken as a negative development, the stock became a hit among retail traders. On Robinhood, the number of users holding shares of Hertz jumped from about 45,000 before the bankruptcy filing to more than 160,000 currently.

For a while, they were making out pretty well despite Hertz's obvious solvency issues. Shares of Hertz jumped from a low of $0.40 per share after the bankruptcy filing to as high as $6.25 per share just last week.

Taking advantage of the disconnect between its stock price and reality, Hertz announced last week that it would sell $500 million worth of common stock. In the filing, Hertz warned stockholders that they could lose all of their money if debtholders aren't paid in full.

Hertz said,


"Although we cannot predict how our common stock will be treated under a plan, we expect that common stock holders would not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured and unsecured indebtedness, are paid in full, which would require a significant and rapid and currently unanticipated improvement in business conditions to pre-COVID-19 or close to pre-COVID-19 levels."

With the stock falling back below $2.00 per share, the Securities and Exchange Commission appears to finally have stepped in and let Hertz know it has issues with the planned offering.

"In this particular situation we have let the company know that we have comments on their disclosure," SEC Chairman Jay Clayton said. "In most cases when you let a company know that the SEC has comments on their disclosure they do not go forward until those comments are resolved."

Clayton did not explicitly disclose what issues the SEC has with the language, but Hertz announced the offering would be "promptly suspended pending further understanding of the nature and timing of the Staff’s review."

"We at the SEC, were are trying to carry out our responsibility in the situations like this as best we can and I expect the other professionals around the situation to carry out their responsibilities and best they can," Clayton said.

Despite the importance of a company's fundamentals all but having been eliminated in the current environment of the market, it appears Hertz's plan to sell shares may have taken it a step too far in the eyes of the SEC.