When companies issue stock for sale, they have to file disclosure statements that warn potential investors about why the stock may not turn out to be a good buy. For example, when Peloton went public last year, the hot startup told investors that it was losing money and might continue to do so for some time. Peloton also disclosed that it competes in a “highly competitive market” and that it might lose business if it failed to “anticipate consumer preferences.” This is pretty normal stuff; stocks involve speculation, some businesses work out and some don’t, let the buyer beware, and so forth.
The disclosures become quite a bit weirder when the company in question is bankrupt. Normally, such companies don’t issue stock for the simple reason that their stock is worthless — a company goes bankrupt because it doesn’t even have enough assets to repay its lenders, let alone return profits to stockholders. Yet for some reason, Hertz stock is currently trading at a few dollars a share. As I wrote last week, maybe it’s because the company stands a chance of running such a good bankruptcy that there’s money left over for the stockholders. More likely it’s because retail investors are bored at home with no sports to watch or bet on.
From Hertz’s perspective, the question of why people want to buy its stock is not terribly important. The company, being insolvent, needs money, and a stock sale is a way to get some. Last week, the judge overseeing Hertz’s bankruptcy approved its plan to sell $500 million worth of stock. Unsecured creditors also gave the nod to this plan — after all, what’s better for a creditor than somebody handing unrestricted cash to your distressed debtor for no apparent reason? And so Hertz filed a statement on Monday with the SEC, stating its intention to sell additional shares of stock and laying out for investors the considerable risks of investing in Hertz right now — while it is bankrupt.
First, Hertz warned investors that the New York Stock Exchange would like to delist its stock, because of, you know, the whole bankruptcy thing. “Delisting our common stock may adversely impact its liquidity, impair our stockholders’ ability to buy and sell our common stock, impair our ability to raise capital, and the market price of our common stock could decrease,” the company notes. Yes, that does seem like a concern.
Hertz added that a bankruptcy outcome in which shareholders end up with any money at all “would require a significant and rapid and currently unanticipated improvement in business conditions to pre-COVID-19 or close to pre-COVID-19 levels.” In other words, once Hertz completes the bankruptcy process, the stock it is offering to sell you today will probably be worth $0. That is not necessarily disqualifying: Lots of stock options are structured such that they will probably be worthless, but people buy them because, in rare cases, they pay out a very large return compared to initial investment. So you can think of Hertz stock as a far out-of-the-money call option on the value of the business, which will pay out only in the case of “significant and rapid and currently unanticipated improvement in business conditions.” Or you can think of it as a bet on a single number in roulette — except that an eventual payout, were it to somehow materialize, would almost surely be much less than 35-to-1. Either way, the message is clear: Prepare to lose your money.
But in case that wasn’t clear enough, the offering twice says that “there is a significant risk that the holders of our common stock, including purchasers in this offering, would receive no recovery under the Chapter 11 Cases and that our common stock will be worthless.”
You can see why the Securities and Exchange Commission might look askance at all this, since one of its key functions is to protect investors — especially unsophisticated retail investors — from getting sucked into scams. SEC Chairman Jay Clayton appeared on CNBC Wednesday morning, and his comments about Hertz had strong I-wouldn’t-do-that-if-I-were-you energy.
“We have let the company know that we have comments on their disclosure,” Clayton said. “In most cases, when you let a company know that the SEC has comments on their disclosure, they do not go forward until those comments are resolved.”
Because Hertz is proposing to sell these shares under an offering registration it made with the SEC well before it went bankrupt — called a “shelf offering,” because it’s like the stock has been sitting on the shelf in Hertz’s office — the company might be able to proceed without the SEC’s new blessing. But Clayton also issued what sounded like a warning to the investment bankers and lawyers who would need to work on the sale, and who might be less desperate for a Hail Mary financing solution than Hertz itself is right now.
“There are professionals involved,” said Clayton. “And look, we at the SEC, we’re trying to carry out our responsibility in situations like this as best we can, and I expect the other professionals around this situation to carry out their responsibilities as best they can.”
A few hours after Clayton made those remarks, Hertz disclosed in an additional filing that it had received notice that the SEC would be reviewing the company’s stock sale plan — and that Hertz would be delaying the sale, for now, as it tries to resolve the commission’s concerns.
Hertz stock closed up 2.5 percent on Wednesday, at $2 per share. With its equity offering in doubt, existing stockholders don’t have to worry as much as they might have that the market could soon be flooded with additional shares competing for the limited attention of investors interested in buying probably worthless stock in a bankrupt company.