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Hertz Halts Controversial Stock Offering After SEC Reprimand

There has been no shortage of buzz in the markets about Hertz Global Holdings Inc. (NYSE:HTZ) in recent weeks. After filing for Chapter 11 bankruptcy near the end of May, the company saw its stock price pop by more than 500% before settling down a little under the $2 range.

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Hertz is one of quite a few "bankruptcy investments" that have emerged in the U.S. stock market as investors and speculators alike pile into everything they can find, even the stocks of companies that have explicitly warned of impending insolvency.

In order to profit off of the sudden new interest, Hertz proposed a new offering of $500 million worth of common stock. In the offering, which was approved on Monday by the judge in charge of Hertz's case, the company explicitly warned potential investors that the stock was almost guaranteed to be worthless:


"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 (which is currently trading at a significant discount), 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."



Preventing a precedent

In a stock market where average valuations are increasing past 2019 levels despite declining sales, Hertz's stock offering might have found enough buyers to raise at least a good chunk of the $500 million, despite how impossible it might have seemed less than a month ago. Betting on a V-shaped economic recovery, some investors in bankrupt stocks think a greater fool will come along and pay a higher price for their shares, while others seem to legitimately think the businesses will recover enough for equity investors to turn a profit.

Concerned that investors would do the improbable and be duped into buying worthless stock, the Securities and Exchange Commission, which is responsible for protecting investors from undue risk, let Hertz know on Wednesday that it had issues with the planned stock sale.

"In this particular situation we have let the company know that we have comments on their disclosure," SEC Chairman Jay Clayton in an interview on CNBC. "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... We at the SEC, we are trying to carry out our responsibility in the situations like this as best we can."

On Thursday, the rental car company finally terminated its controversial venture in order to avoid having the SEC take action.

If Hertz had been successful in its offering, it wouldn't have just claimed free money for its creditors from the hands of investors. It would have also set a precedent for other bankrupt companies to follow in its footsteps, tapping into Mr. Market's irrationality to create an entire new class of ultra-high-risk investments.

Next steps

Instead of the equity sale, Hertz now plans to seek additional bankruptcy financing of $1 billion from its top lenders. Unlike the money from an equity sale, the loan money will, of course, need to be paid back to the lenders eventually. This would add approximately 5% to the company's existing $20 billion worth of debt.

Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.

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This article first appeared on GuruFocus.