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Oh dear, oh dear

Dominic O’Connell is business presenter for Times Radio


Meme stocks, blah blah:

There is a precedent, however: two years earlier another transport company, Hertz, the car rental group, also filed for Chapter 11, having been laid low by the pandemic. It decided to try to raise the money it needed to get out of bankruptcy by issuing new shares. This is not normal: again, in Chapter 11, the people with first call on the money are the lenders, not the shareholders. In one court hearing, Hertz’s lawyer freely admitted that the new shares, and the old, could be worthless. And, you guessed it, Hertz’s share price went up, even though it was printing more probably worthless shares to add to a large pile of already probably worthless shares.

That also makes no sense. Unless, of course, you remember some of the other weird stuff that was happening at the time. Hertz got into trouble just as the meme stock phenomenon gripped US markets.

No, Hertz was rational.

Why did it go bust? It had financed the fleet with bonds. Those bonds required a certain level of cash security against the fleet value. Second hand car prices dropped – at the same time as travel near ceased. Hertz didn;t have the cash to back the bonds, it’s bust.

But then new car production near ceased. Second hand car prices soared – to higher than new often enough. That meant Hertz wasn’t bust – the value of the fleet was now more than the debt burden.So it comes out of Chapter 11 with the old equity worth something.

This is important. Because it’s not true that Hertz was like GameStop, AMC and so on. Hertz was the cause of GameStop, AMC. The proof that a company could roar back from Chapter 11, the foundational belief that made the others possible.

But then I’m not a business presenter so I have to actually know things.

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