You may have heard about the rental car company Hertz and its tough journey throughout the Coronavirus pandemic.
The 100 year old company was hit especially hard by lockdowns. In addition to having its entire business dry-up as people stopped travelling, certain terms in their billions of dollars of debt made it even more dire.
A lot of their debt was collateralized by their used car fleets and when the value of used cars plummeted in the first part of the pandemic, creditors came in to seize the collateral.
Most people thought that the company had finally met its demise. One of those people was a legendary investor and billionaire hedge fund manager Carl Icahn. Icahn had a multi-billion dollar position in Hertz. For a long time, he had touted Hertz as a great company and a strong brand.
But when Hertz finally announced that they were filing for bankruptcy in June of 2020, Carl Icahn threw in the towel and sold 55 million shares at just $0.72 each. Counter-intuitively, if he just held on to those shares, he would be in a much better position today.
Hertz has since seen Wall Street Bets essentially save the company. New investors came in and injected capital and has been able to pay off the majority of its debt. It is now out of bankruptcy and its brand new stock is worth a healthy $7.5 billion dollars.
So, what happened with Hertz? Why did Carl Icahn dump his shares? And most importantly, how much money did he lose?
In April 2020, as Coronavirus was first ravaging nations across the world and travel ground to a halt, Hertz saw its business decline by 80%. It announced that it could no longer make all of its lease payments on its fleet of rental cars.
It was already in a stressed financial position with more than $17 billion dollars of long-term debt going into 2020. Combined with an unprofitable income statement and fragile cash flows, Hertz could not afford to lose any business.
In 2020, their total revenue was cut in half and with their losses widening to almost $2 billion dollars. With this development, Hertz was forced to seek bankruptcy protection. Their stock tanked from as high as $20 dollars per share in the beginning of 2020 to less than $1 dollar.
In May 2020, Hertz formally filed for chapter 11 reorganization. It was one of the largest companies to go bankrupt during the Coronavirus pandemic at the time. Under chapter 11 bankruptcy, Hertz was to negotiate with its creditors to restructure its debt.
Usually chapter 11 means that stockholders end up getting wiped out because unless creditors are paid back the full amount owed to them, there is usually nothing left for shareholders. In the case of Hertz, that looked to be especially the case since the company had so much debt.
Around this time, billionaire investor Carl Icahn owned 55.3 million shares of Hertz’s stock. Carl Icahn is one of the most successful activist investors alive today and is worth billion of dollars. He had been a long time supporter of Hertz and a shareholder since it went public in 2014. That year he disclosed in SEC filings that he owned more than 38 million of Hertz shares.
But with the pandemic taking Hertz into bankruptcy, he declined to save the company with his own capital and sold his shares. On May 26th, he sold his entire position for $0.72 per share. In a statement to his own shareholders at Icahn Enterprises, he said that he had sold his stake at ‘significant losses’. But he also said that he continues to have faith that the company would be able to gain new capital and become a great company once again. He just did not think that the current shares would be able to survive through bankruptcy.
On June 11th, Hertz announced it had gained approval from a judge to raise a billion dollars of new capital by issuing new stock. There were concerns about selling stock when the company was going bankrupt.
Around the same time, many people on Wall Street Bets were talking about Hertz as a potential deep value investment. With shares at such depressed levels, the downside seemed quite limited compared to the upside to them.
Retail traders started buying up shares of the bankrupt company leading to a bump in the share price. Hertz wanted to take advantage of this investors sentiment by issuing more of its bankrupt stock.
Issuing a billion dollars of stock when the stock was likely worth nothing was seen as potentially unethical on the part of the business and management. Nevertheless, Hertz disclosed explicitly that there was a chance that the stock was worthless and was given the go-ahead by a judge.
They were able to raise $29 million dollars from the public markets before getting stopped by the SEC. That small $29 million dollar windfall was not enough to save Hertz. For the rest of 2020, Hertz continued to hemorrhage cash.
The future did not look bright for the company but that all changed in May of 2021. With lockdowns lifting and travel coming back with a vengeance, all sorts of travel stocks started to rebound. Even the commercial airlines started reporting quarterly profits.
Hertz stock was given new hope when the company announced that several investment managers had agreed to make a massive investment in the company. These included Knighthead Capital Management, Certares Opportunities, and Apollo.
With the new capital, Hertz would be able to emerge from bankruptcy. Even better, the infusion of billions of new capital also meant that existing shareholders were afforded a chance at redemption. The new bankruptcy exit plan included provisions to pay a total of $239 million dollars in cash to the existing shareholders.
It also provided for existing shareholders to receive a stake in the new company after bankruptcy. On the news, the old shares of Hertz skyrocketed, eventually reaching a height of nearly $10 dollars a share. Hertz also started trading new shares under the ticker symbol HTZZ.
The stock price currently implies a market value of the company of $7.5 billion dollars. Although the new Delta variant of Coronavirus has dampened demand for all travel stocks leading to Hertz’s share price to decline significantly once again, it’s nowhere near the level of decimation from early 2020.
So, how much money did Carl Icahn lose with his Hertz investment and how much did he miss out on by selling his position?
When he sold his position, he had about 55.3 million shares. He built up and trimmed the state over the course of many years, so it’s hard to know exactly what his average buy price was as well as the time value of the position.
But before 2020, Hertz’s shares were trading at close to $30 dollars per share. That means his position was worth around $2 billion dollars. When he dumped all 55 million shares, the average price he got for them was just $0.72. The proceeds from that sale would only have been $40 million dollars. That’s a 99% loss or at least $1.8 billion dollars.
The amount is a huge loss even by Wall Street’s standards. It ranks among the biggest trading losses in history. In comparison, Michael Burry’s famous short position during the 2008 financial crisis, dramatized in the film The Big Short, was on a significantly smaller scale. He profited about $700 million dollars, which is still a lot but less than half of the amount Carl Icahn lost on Hertz.
The only hedge fun losses that eclipse this loss are the major disasters that ended up bankrupting the funds such as Archegos and long-term capital. It’s a major blemish on the track record of Carl Icahn especially since if he had just held on to those shares, he would have made back hundreds of millions of dollars on the losses.
The story of Hertz is also a major win for retail traders epitomized by Wall Street Bets. When Hertz was in the depths of its bankruptcy, Wall Street ridiculed retail investors for piling into what they thought was a worthless stock. They laughed at Wall Street Bets saying that Hertz was just trolling them by issuing bankrupt stock.
Fast forward a year and it turns out that Wall Street Bets was right. The same stock that amateur investors bought at the lows of one dollar or even less is now worth close to 10 times that amount. Maybe Wall Street Bets got lucky and maybe Carl Icahn just got unlucky, but, no one can deny that in the stock market where anything can happen, Hertz was a classic case of David beating Goliath.