Could We Have Seen Hertz’s Bankruptcy Coming?

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Hertz’s stock (NYSE: HTZ) has fallen to a dollar since the company filed for bankruptcy on 22nd May 2020. The company has about $19 billion in debt and nearly 700,000 vehicles that have been largely idled because of the coronavirus. The company had laid off 12,000 workers and furloughed an additional 4,000 employees (25% of its workforce) in March 2020 but that was still not enough to save it.

But could we have foreseen Hertz’s bankruptcy around the end of March when it was amply clear that the coronavirus outbreak will materially affect its business? Trefis analyzes the Impact Of The Covid-19 Recession On Hertz with a focus on Hertz’s liquidity reserves and highlights how a simple forecast of cash flows under adverse economic conditions like the one presented by the pandemic could have warned investors about an impending bankruptcy.

 

Quantifying The Impact Of Covid-19 Outbreak On Hertz’s Revenues 

  • We estimate that a recession that persists through late Q2/early Q3 2020 would potentially reduce the company’s revenues by 50% from $9.8 billion in 2019 to $4.9 billion in 2020.
  • If the outbreak gets worse, Hertz’s cars will remain idle longer, until the situation improves. As a result, the company’s revenues could decline by about 75% in 2020, on account of weaker demand, more focus on essentials thereby a reduction in discretionary spending and less travel.
  • Even with the slow reopening of the economy as lockdowns beginning to lift, social distancing measures may continue for months, which will impact people renting cars for outings.

 

This Was Bound To Have A Marked Impact On Hertz’s Cash Flows

  • Even under the milder scenario forecast, we find that Hertz’s cash flows would have been insufficient to cover its debt obligations due to a steep reduction in revenues and a hit to profitability.
  • After all, elevated fixed costs, coupled with lower revenues, would have hurt the company’s bottom line despite the company’s decision to lay-off 12,000 workers and to furlough an additional 4,000 employees (25% of its workforce) in March 2020.
  • In fact, we estimate that Free cash flow from operations (FCFO) would go down from $2.9 billion in 2019 to around $1.5 billion in 2020. Also, with expected capital expenditures of $3.3 billion for the year, FCFO-CapEx would be -$1.9 billion in 2020.

Cash Balance Impact And Aftermath

  • Taking all these factors together, we estimate that Hertz would have ended the year with a cash balance of -$0.5 billion.
  • Hertz’s high capital expenditure – low profit margin business compounded its problems, as the company could not secure any additional credit
  • Hertz filed for bankruptcy roughly a month after it missed a payment that was owed to a group of lenders that lease vehicles in Hertz’s day-to-day US rental fleet on April 27.

 

Conclusion

Hertz has a rocky road ahead with its bankruptcy proceedings. But as seen before, a few companies do survive and, in fact, emerge stronger from bankruptcy. Will Hertz be able to be one of those companies? That will depend on how Hertz navigates through the economic recession over the next few months. For an alternative scenario with a 75% fall in revenue, see our full analysis of the impact of the Covid recession on Hertz.

View our dashboard analysis U.S. COVID-19 Cases dashboard for the current rate of coronavirus spread in the U.S. and forecasts on where it could be headed, based on comparison with other countries. Our dashboard -28% Coronavirus crash vs 4 Historic crashes builds a complete macro picture of historic crashes and how the sell-off during early March compares.

While Hertz has filed for bankruptcy, is BorgWarner’s stock recovering?

 

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