Hertz wants to cash in on surging shares amid bankruptcy
Car rental giant Hertz has filed for bankruptcy because it doesn’t have enough money to pay its debts — and its stock is soaring.
Welcome to the coronavirus stock market, where mom-and-pop day traders addicted to free trading apps are running roughshod over traditional investing norms.
Hertz shares soared some 68 percent on Friday after the company unveiled plans to sell 246 million shares as part of an unconventional plan to raise $1 billion in bankruptcy financing. In requesting court approval for the stock sale, Hertz’s lawyers cited the tenfold increase in its shares in the two weeks since its May 22 Chapter 11 filing.
“The recent market prices of, and the trading volumes in, Hertz’s common stock potentially present a unique opportunity for the debtors to raise capital on terms that are far superior to any debtor-in-possession financing,” the company said.
Hertz shares, which closed Friday up 37 percent, to $2.83 a share, have soared more than 300 percent since May 26 — the first trading day after it declared bankruptcy.
The boom has coincided with the stock’s growing popularity among retail investors: Nearly 166,000 users on the Robinhood trading app held Hertz shares as of Friday, up from about 44,000 on May 26, according to data compiled by Robintrack.
On Friday, a judge approved the stock sale, despite risks that the shares could go to zero, creating more problems for Hertz. “Selling shares that could potentially be wiped out in Chapter 11 may leave Hertz exposed to securities lawsuits that would arise post-petition and could result in additional administrative claims,” Bloomberg Intelligence analyst Philip Brendel said.
Amateur traders have plunged into several other companies that are in bankruptcy or on the verge of it in recent weeks, such as retailer JCPenney, Whiting Petroleum and Chesapeake Energy.
Whiting’s share price has more than quadrupled since it declared bankruptcy in early April, while JCPenney’s has doubled since its mid-May filing.
Citadel Securities, which executes many of Robinhood’s trades, disclosed in a client note on Wednesday that buying activity on stocks trading at less than $1 per share was up 79 percent in recent days.
The bizarre behavior suggests wannabe day traders are thumbing their noses at investment tycoons such as Carl Icahn, who sold his 39 percent stake in Hertz at a $1.8 billion loss days after it declared bankruptcy.
Barstool Sports founder and amateur trader Dave Portnoy has called Warren Buffett an “idiot” for dumping his airline stocks, which jumped earlier this week amid a dizzying market rally.
Hertz’s bid to sell shares came a day after it revealed the New York Stock Exchange moved to delist the company last month. Hertz has appealed the decision, but there’s no guarantee it will stay on the exchange.
Hertz has acknowledged that “an investment in Hertz’s common stock entails significant risks, including the risk that the common stock could ultimately be worthless.”
With reporting by Thornton McEnery