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Hertz Global Holdings (A): Uses of Debt and Equity

Hertz Global Holdings (A): Uses of Debt and Equity

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Yale School of Management
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By 2019, Hertz CEO Kathyrn Marinello and CFO Jamere Jackson had managed to streamline the venerable car rental firm's operations. Their next steps were to consider ways to fine-tune Hertz's capital structure.

From its 1918 beginnings, the company had grown to be the second-largest car rental company. It had a fleet of around 535,000 vehicles at over 10,000 locations. The company dominated business travel in the U.S. with prime airport locations. 

Hertz had gone through a wide range of capital structures and ownership models. It had created ABS (Asset Backed Security) programs to supply its fleet. Hertz had established bankruptcy-remote trusts, also described as special-purpose entities. These entities issued the ABS debt and used the proceeds to purchase vehicles, which it then leased to the company.

The special-purpose entities were able to issue debt securities that provided Hertz with lower interest debt, since the vehicles that served as collateral were not available to other claimants under a potential bankruptcy. Also, under the terms of the loans, the risk of excess depreciation on the vehicles, beyond the expected depreciation built into lease payments, was borne by Hertz, not the ABS lenders.

Hertz in turn sought to reduce its exposure to unexpected depreciation by purchasing vehicles under agreements with manufacturers to repurchase the vehicles at a specified price or a guarantee to cover a contracted depreciation rate. Approximately 25 and 60 percent of Hertz’s domestic and international vehicles were Program vehicles. For the remaining non-program vehicles, Hertz bore the risk of unexpected depreciation.

With its large fleet of vehicles, Hertz had been able to incur substantial debt, including the collateralized bonds based on its substantial fleet assets. The company also held corporate unsecured debt. In 2019 it issued $750 million in new debt to redeem earlier notes issued at 7.625%. 

Issuing secured debt to modernize the fleet had proved successful, but this secured debt combined with substantial unsecured corporate debt had resulted in a highly leveraged capital structure. Would it make sense for Marinello and Jackson to lead Hertz to issue more equity to re-balance the structure? One possibility was a stock rights offering, but an established company issuing equity was not generally well-received by investors. How well would the market respond to an attempt by Hertz management to increase shareholder equity?

Published Date2021-01-11

Suggested Citation: Jean Rosenthal, Geert Rouwenhorst, Jacob Thomas, Allen Xu, "Hertz Global Holdings: Uses of Debt and Equity," Yale SOM Case 20-030, January 11, 2021

Teaching Note: No