US car rental company Hertz plans to raise $1bn in equity from investors, taking advantage of a speculative stock rally, an unheard of move for a firm whose solvency is in doubt.
The Florida-based business, which filed for Chapter 11 bankruptcy in May, is asking for court approval to potentially issue up to 246.8 million shares.
Hertz said it would use the cash to help fund the company’s reorganisation process and would come in lieu of the traditional senior loan tapped by most companies undergoing bankruptcy proceedings, it said in a filing on Thursday.
Most of the stock Hertz sold has been picked up by retail investors, hoping to pass the stock on for a quick sale as the price continues to rise. Legendary activist investor Carl Ichan sold his shares in Hertz for a $1.6bn loss last month after holding them for six years.
“The recent market prices of and the trading volumes in Hertz’s common stock could 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.
However, Jared Ellias, a law professor from the University of California and an expert in bankruptcy cases, said: “Hertz looks at the market and sees there is a group of irrational traders who are buying the stock, and the response to that is to seek to sell stock to these people in hopes of raising some amounts of money to fund their restructuring”.
Hertz shares traded at $0.56 only a day after the company filed from bankruptcy but bounced back to $5.53 per share, after retail investors from stock trading platforms such as Robinhood saw an opportunity to speculate on the company’s recovery.
Shares in the car rental company have lost more than half of their value since hitting that post-bankruptcy high, following the recent stock market sell-off triggered by worries of a second wave of coronavirus in the US. The stock closed yesterday’s session at $2.06 and it is up 53.8% in pre-market stock trading activity.
The New York Stock Exchange moved to delist Hertz after its bankruptcy proceeding started, but the business successfully appealed the decision.
The bankruptcy judge appointed for Hertz’s case is expected to rule a decision on the proposed issuance of shares on Friday.