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S&P: Workout plan would better suit Hertz debtors than liquidation

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The recoveries that asset-backed securities investors and creditors might expect from Hertz Global Holdings remain in limbo, as both groups await the planned workout structure for the global rental-car giant to emerge last week’s coronavirus-induced bankruptcy filing.

However, according to S&P Global Ratings, the best outcome for debtholders including ABS noteholders with approximately $6 billion in outstanding bonds is likely to be through a renewal of Hertz’ operations, rather than liquidation.

“Despite the May 22, 2020, bankruptcy filing, we believe Hertz maintains a viable business model because of its extensive network of locations and strong brand awareness,” according to S&P Global. “We also believe that its debtholders would achieve the greatest recovery value through a reorganization rather than through liquidation.”

In addition, S&P noted, Hertz’s international operations will not be part of the reorganization, “which we had previously anticipated.”

S&P estimates an 85% realization rate on the net value of Hertz’s vehicles, representing a 5% decline from its previous assumption due to the stressed retail market for used cars.

Hertz filed for bankruptcy last Friday, citing $24 billion in debt and an inability to negotiate extended forbearance and limited waivers on lease payments for asset-backed securities tied to its rental fleet.

The structured finance debt itself is not part of the bankruptcy, as Hertz's special-purpose vehicle (SPV) subsidiary is remotely held and serves as a master trust of the ABS notes. But Hertz Corp. is the servicer, administrator, lessee and guarantor for the Hertz SPV, and "Hertz’s obligations on the lease could nevertheless impact that debt" in the bankruptcy filing, according to a research paper from Xtract Research published prior to Hertz's filing.

Hertz’s creditors were unwilling to grant further relief after previously allowing to defer a $400 million payment due May 22. Hertz had been granted the limited waiver after skipping an April 27 payment to ABS investors.

The Delaware filing allows Hertz to keep operating while it formulates a turnaround strategy.

Hertz’s fleet-financing business model is followed by most other rental car firms. Rather than acquiring and owning fleets from manufacturers with buyback agreements, Hertz leases the vehicles through the SPV that maintains ownership of the autos, and periodically issues bonds secured by the lease payments to finance new fleet purchases.

The trust is obligated to maintain proper levels of collateral enhancement to the notes, which is partly tied to the market value of the vehicles in the fleet.

Investors are paid through rental-car operational revenue as well as from the sale of vehicles retired from the fleet.

Rental-car companies like Hertz and Avis Budget Group have been among the hardest hit in the travel industry by the COVID-19 pandemic. Both Hertz and Avis saw their corporate ratings downgraded by Moody’s Investors Service, and most of the Hertz Vehicle Financing II trust’s ABS notes issued since 2015 have been downgraded or placed under review by Fitch Ratings, DBRS Morningstar and Moody’s. (S&P itself does not rate the ABS notes.)

On Wednesday, S&P lowered Hertz’s issuer credit and issue-level ratings to default status from its previous selective-default setting. However, S&P did not change the expected recovery ratings, due to the lack of a pro forma capital plan in Hertz’s Chapter 11 filing.

Hertz's revenue in April had fallen 73% from the same period in 2019, and the company had burned through nearly $1.4 billion in cash since January as its revenues collapsed during the COVID-19 outbreak. The company has lost most of its retail sales channel from the demise of domestic and international air travel due to the pandemic, and also has lost out on proceeds of fleet vehicle sales that have been unable to take place because of shelter-in-place restrictions that closed many nonessential businesses since March.

Hertz depends on the cash flow from both streams to service its ABS vehicle obligations.

“Substantially weaker conditions in the used car market have caused Hertz’s liquidity to become severely constrained,” S&P’s report on Wednesday stated. The cash crunch forced Hertz to miss its April 27 lease payments on nearly $4 billion in ABS vehicle securitizations, leading it to enter into forbearance agreements through May 22.

The bankruptcy filing ensued from unsuccessful attempts to negotiate a restructuring of the lease obligations.

S&P’s report also noted first-lien non-vehicle debt has as estimated potential recovery range of 70%-90% from the bankruptcy filing, according to S&P, based on the available collateral to $848 million of nearly $1.09 billion in secured first-lien debt claims.

Second-lien notes totaling $363 million have much lower recovery expectations of 0%-10%.

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Rental fleet ABS Auto ABS Bankruptcy The Hertz Corp. Coronavirus