COVID-19 and the Shelter in Place Orders Have Wrecked Businesses (Chapter 11)

When there is an extended interruption in cash flow, many large corporations turn to Chapter 11 bankruptcy relief.  I am not surprised that Hertz filed for Chapter 11 bankruptcy relief just like a lot of other companies have done recently.   We can expect more filings to occur as lenders are forced to take collection measures. Chapter 11 essentially gives a company a time out to reorganize its debts.   Many companies close underperforming locations and then seek to obtain new financing to fund operations going forward.   Large creditors often trade debt for controlling interests in the company going forward.  Some companies go into a chapter 11 filing with a pre-negotiated agreement with their creditors to save time and minimize the stigma of being in bankruptcy for an extended period of time. Covid-19 and the accompanying shelter in place orders have wrecked businesses nationwide.  Airlines have been hard hit which then pours over to the rental car companies.   Corporations have taken on record amounts of debt over the last five years.  It is not surprising that Hertz has racked up billions of debt.   Forbearance agreements and short term deferrals by creditors have been commonplace since April but that can only last so long.   Without an infusion of more government aid, many companies are going to have to shed debt through the bankruptcy process and go forward with a leaner balance sheet.  Continued shelter in place orders and restrictions are only going to compound the problem. Car and van leasing companies have come under pressure to sell vehicles to free up cash.  Consumers are going to see a wave of used cars coming on the market for sale.   For Hertz, they fueled their growth by getting billions of securitized debt.  Hertz got loans to purchase vehicles which were then leased to Hertz.  Investor like the results over the short term.   As the car values fall, Hertz has to pay in more on a monthly basis to reduce the outstanding loan balance exposure to the lenders.  That makes for a bad long term situation if car values and sales rapidly drop due to economic forces (i.e. Covid-19).   Besides those obligations, Hertz had traditional credit lines, loans and bonds.   Missing car lease payments can trigger defaults on those separate obligations bringing everything to a crashing halt.  That is why Hertz filed for bankruptcy protection. What is the alternative to bankruptcy relief?   The answer cannot be repeated government loans and bailouts.  Companies like Hertz took the gamble by piling on debt during the boom years.  Maybe market forces need to clean up the car rental business and allow small, leaner companies survive.    In any event look forward to a lot of used cars added to the car lots.