Famed car rental company Hertz (NYSE:HTZ) seemed to be on the verge of collapsing after it had filed for bankruptcy. However, things took a dramatic turn last week after it emerged that the company had secured substantial financing and on Friday, the stock soared by as much as 143%. In such a situation, it could be a good idea for potential investors to take a closer look at Hertz.
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Substantial Capital Infusion
On Friday it emerged that the more than century-old car rental company was going to get financing to the tune of as much as $1.65 billion. The news naturally came as a major boost for the Hertz stock and investors piled on to the stock in hordes. It remains to be seen if the stock can add to its gains today.
The car rental industry had been wrecked by the coronavirus pandemic and that had prompted Hertz to file for bankruptcy. While the capital infusion is substantial, investors need to keep in mind that the Federal Bankruptcy Court will need to approve it first.
The Chief Executive Officer of the company Paul Stone stated that the financing is going to help the company with much-needed ‘financial flexibility’ so that the effects of the coronavirus pandemic can be tackled.
Bankruptcy Process to Continue
As Hertz continues with the next stages of the bankruptcy process but the capital infusion is going to allow the company to continue with its operations.
The nature of the financing that Hertz has got is known as debtor in possession financing. Only companies that are in bankruptcy can get it. It allows those companies to continue their operations and even raise capital while the bankruptcy proceeding carries on.
The financing may be a positive development but it is necessary for retail investors to look a bit deeper into Hertz’s business. The company already has a debt pile of as much as $15 billion, which is linked to its fleet of vehicles.
Depending on the direction that the company decides to take, the main lenders who helped Hertz get hold of the fleet of vehicles are going to be paid first. Their payoff is going to depend on the valuation of Hertz.
However, it should be noted by retail investors that after the lenders have been paid off, whatever valuation remains of the company, is going to be spread among common shareholders.
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