No, the article was calling out Carl Icahn for directing $57M last year to other companies he controls while being a minority owner of Hertz and the company obtaining $1.4B in new debt maturing no earlier than 2026 to service expiring debt. This is not being used to finance their working inventory except in the following sense "...it’s 500,000 cars act as collateral for $13 billion in financing — and when the collateral drops in value, the company has to make up the difference in cash." [1] The conventional model is leasing deals with the automakers that allow the rental company to sell back the cars at the end of the lease term, not try and dispose of them on the open market.

[1] https://nypost.com/2020/05/03/hertz-struggles-during-coronav...

> Carl Icahn for directing $57M last year to other companies he controls while being a minority owner of Hertz

Is that legal? Could Carl Ichan be civilly or criminally liable? Potentially go to jail?

These debt sheet power moves by billionaires impact stockholders, including retirement and pension funds. When the companies they control go bankrupt, they materially harm the people who can't play at that level.

I don't know if this was wrong, but the outcome was certainly not good. It's high stakes gambling with other people's livelihoods.

For others: it's legal, and it's basically all Icahn does - he's probably the most famous corporate raider. He obtains a minority stake in a company, gets a seat or two on the board, bullies the management into taking on tremendous amounts of debt, and uses the cash to pay himself and the other investors, calling it "unlocking value for shareholders." The once-healthy company is eventually sucked dry and he moves on to his next target.

Timely Onion article: Protestors Criticized For Looting Businesses Without Forming Private Equity Firm First[1]

1. https://www.theonion.com/protestors-criticized-for-looting-b...

Corporate raiding was popular in 80s,but since then many methods were created to defend companies from such activities.For a minority shareholder to get a board seat is doable, however to bully the entire board into dancing, requires weak donkeys.If the CEO cares more about his own job than the company he's supposed to run,then it's quite easy for the like of Icahn to do whatever they want to. Having said that,I've got a feeling that he's mostly after vulnerable companies that can be influenced for one reason or another.

It doesn't really make sense to me who loans companies money in these circumstances. Aren't they the ones always left holding the bag?

Yes and no. They're the first parties in line to pick apart bankrupt companies. The stockholders are the ones left out in the cold.

Same question then...when Icahn or others of his ilk get their claws into a board, why don't rational investors flee like the dickens?

But Icahn is a stock holder too, just sell when he does. It seems like the debt lenders will just be left with a few stripped bones to chew on.

Couple of things going on. There are a lot of institutional investors where fiduciaries have no skin in the game and are being corrupted via a soft bribery. Central banks have flooded the world with cheap capital. And you have system where stockholders that end up holding the bag (AKA you and your 401k) don't have voting rights.

Seems like a blatant conflict of interest and misappropriation of company funds.

He not only stole from the Hertz and from the bank, but he also stole from every US citizen because that credit was printed out of thin air by the bank when it was loaned to Hertz... The creation of this debt diluted the value of the dollar for every citizen of the US... Then that credit went to Icahn while he knew perfectly well that he was running this company straight into the ground.

This is definitely fraud.

It’s called fraudulent conveyance.

you fool - icahn is a shareholder with mostly his own fortune

>Is that legal? Could Carl Ichan be civilly or criminally liable? Potentially go to jail?

Ichan is one the world's most famous financiers, rest assured he's got an army high paid lawyers poring over the fine print of these transactions. It's legal, but not ethical, or "right".

Unless a matter is blatantly criminal the advice from the army of lawyers is usually just one of many factors taken into account when assessing the risk/reward. It's rare for management to ignore the advice of counsel completely but it's definitely not unusual for executives to have a higher risk tolerance than the attorneys.

Those armies of high paid lawyers are not always right. Plenty of companies get it wrong and then pay the price in court.

If the "downside" is paying fees in court, then it's a simple calculus for when it's worth it to follow the law and when not to. You're just doing business exchanges now with the legal system.

i guess the point isn't that they are right or wrong, it's what it takes to even decide that. high paid lawyers will need more high paid lawyers against them with zero guarantee of success.

IMO, you can't really blame a minority shareholder for what a business does. By definition, a minority shareholder does not have the power to force a business to do anything; Icahn works primarily by influence.

If the corporate leadership is weak, incompetent, scared, or any other pejorative you want to dredge up, then Icahn might convince them to make some bad decisions that benefit him.

Apple is an example of a company that Icahn when into full speed, and didn't really change that much. In the end, Icahn sold his Apple stock for a gain, but Apple leadership obviously made their own good decisions despite him. In fact he would have made a lot more money on Apple if he had held his stock for longer.

But "buy and hold" is not how he has fun, and that's what all this stuff is about. Carl Icahn does not need any more money. He likes doing what he does for the same reason Lebron James still likes playing basketball.

The shareholders that matter are all on the same team. There's no way other shareholders would have let Icahn direct $57m from their collective pocket to his own 3rd party businesses unless they were getting a cut.

Another downline impact of this, from an economic standpoint, is automaker sales. Depending on the automaker, fleet sales (much of which are to rental car agencies) can exceed 50% of total vehicle sales. So, if rental agencies aren't buying new cars this year, that will have a massive impact on automakers volume.

Now, fleet sales are typically very low margin for automakers, but they still need that volume to keep the lines productive without reducing labor (another economic impact).

One bright spot is that most suppliers that I have dealt with only produce about 25% of their volume for new car manufacturing and the rest are "service parts" (repairing existing cars). So, hopefully it won't have chapter 11 impact on most suppliers as the service market should be quote healthy again soon.

Fleet sales would track pretty closely to rental car use (and therefore travel), right? If so, why would bankruptcies among mostly-commoditized rental car companies impact automaker bottom lines? Avis needs to buy more cars to make up for the volume spike from Hertz' reduction, keeping aggregate sales constant relative to a no-bankruptcy scenario.

I think the argument is that rental business is down all over, not just at Hertz. Even if all the Hertz business goes to their competitors, the demand for new rental cars will be way down this year.

Yes, the whole economy is built upon cash flows. The moment cash flows stop, it collapses unless one has a reservoir of savings lying elsewhere. Even in Macro Economics, every model has to be stock-flow consistent (check Wynne Godley's work on this).

It was not always like that. There was a time when companies were not using so many finance tricks and had better resilience and balance sheets. Unfortunately, since the 80's there has been a trend of increased financialization of the economy, most probably caused by the secular decrease in interest rates.

I would argue this is actually fortunate. While financialization absolutely causes fragility of individual companies, it makes the aggregate more stable, as it's also easier to prop up (or pick apart) Hertz with minimal interruption of actual rental car service.

At the end of the day, for most companies, too much debt relative to cash flows is just a sign of overextension. And aggressive "real" business practices is hardly something that companies were immune to prior to financialization.

Why Hertz in particular then? They aren't the only rental car company.

Not all of it. The smart companies are debt free, and are in a much better financial position right now. I'm not saying they're not hurting. I'm just saying they have a better chance of being around still when this pandemic is over.

Side note: You can run your personal finances 'debt free' and be in a better position when shit hits the fan too. :-)

"The smart companies are debt free" - every company has debt. All of them. Apple pays for Iphone parts 30, 60, 90 days after receiving them. That's debt. The only companies that don't take on debt are the ones that nobody will extend credit.

Hertz went bankrupt because of the type of debt they took, their lack of cash-on-hand, and the aggressiveness of their business model. But the expected value of their decisions may well have been positive - a single failure is a bad way to evaluate a decision-making methodology.

When you say every X is Y, then you've obviously defined Y in a non-useful way. Every concept, to communicate information, has to distinguish between some things which it includes and other things it doesn't. If nothing else, there has to at least be a conceivable counterfactual world where Y doesn't hold for everything.

Every dodo is a bird - the concept of a bird is useful to explain what a dodo is (in part, at least).

In this case, I happened to use manufacturing inputs for a specific reason: cars are the inputs to the end product of car rental companies. In the same way it makes sense to pay for product inputs after you've sold an iphone, it makes sense to pay for the cost of a car after you've made the money renting it. If you have to bootstrap, you can't leverage economies of scale nearly as effectively.

>> You can run your personal finances

I’m not convinced that people who apply prudent personal finance strategies ever come up with anything worthwhile in corporate or government financial scenarios.

The difference between a persons finances and that of a legal vehicle with limited liability or an entity which can print its own currency, these aren’t differences of degree, these (and other differences) change the entire game.

And this summarizes the core problem with "moral hazards". Private companies which actually "prepare" for uncertain market conditions are not being rewarded right now.

To make this more concrete, let me give you a recent example for advertising. I was watching a YouTube clip from user Jomboy Media about a baseball strike-out. I noticed in the background the stadium seats had Delta decals for marketing purposes. The fact Delta is permitted, effectively by government authority, to continue to advertise in the "market" because of their bail-out, distorts supply and demand. Namely, Tyson Foods, which was able to be assiduous with their profits over the years and provided wages to their employees during the pandemic, suffer from this blatant "synthetic" market competition.

But why aren’t avis and enterprise in the same straits as hertz? Sure they have difficulties, but aren’t yet seeking debt relief.

"While all travel-related companies have been hurt by the pandemic, a big factor for Hertz is its strategy of owning or leasing a large portion of its fleet outright instead of acquiring them through buyback agreements with manufacturers."

https://www.bloomberg.com/news/articles/2020-05-25/hertz-say...

Enterprise is privately owned and I was told they were debt free when I worked there. Enterprise Fleet (i.e. company cars) has different debt covenants.

They were able to better manage their fleets. They also didn't increase their pricing like Hertz did when their debt was spiraling out of control which allowed them to take a lot of Hertz business.

You can see my three bullet points on the previous response on how they mismanaged their fleet.

Agreed.

The two articles I read pointed these out:

1) When Hertz bought Dollar Thrifty their due diligence failed to realize that most of their cars were well past their prime which required another sizable investment to replace all of Dollar Thrifty cars.

2) Frissora tried to hold onto their cars longer past the depreciation period, trying to keep them until 50K miles, way past the industry norm of 30K miles. He also then took these older cars and sent them to their other budget rental companies Dollar Thrifty and Firefly

3) When Tague entered after Frissora left, he started updating a majority of the fleet with sedans, right in the middle of height of the popularity of the SUV. His other blunder was trying to increase prices, thinking the rest of the industry would follow suit. Instead, they kept their pricing lower and started taking big chunks of the Hertz market.

All of three of these gross miscalculations caused their debt to increase too fast and ultimately was their undoing.

Do you know what proportion is vehicle debt? If it's 90%, then you have a point. If it's significantly lower, then it's certainly questionable.

Also, why redeem strategic debt due for 2021 so early?

Looks like from their first quarter 10-Q 14B of their 18B in debt is specifically vehicle debt, so 77% [1].

[1] http://ir.hertz.com/sec-filings

Better link: https://www.bamsec.com/filing/165785320000049/1?cik=1657853&...

There are MANY other car rental companies that are not declaring bankruptcy, as far as I know. I was curious to know why Hertz was one of the first -- and I feel this article did a good job of pointing out that it was largely because of Carl Icahn. (Was I the only who actually said, "Aaaaah ... ok then" when I read his name?)

>> They finance new cars, rent them out for a while, then dispose of them. That all works fine and vehicle debt is not a problem when rental income covers the interest+depreciation on the vehicles.

Financing anything is ok until something goes wrong. The problem is that too many people and companies are living paycheck to paycheck. God forbid a company hold enough cash to finance their own operations - no that needs find it's way to the shareholders.

A recent headline at CNN said the next problem for the economy was people saving money during the crisis or even paying down debt. SMH.

> Obviously it becomes a problem when rental income disappears at the same time depreciation increases because of a depressed used car market. Hertz clearly didn’t plan for that. But breathlessly calling out the headline debt number without acknowledging that vehicle debt is a reasonable strategy for a rental car company is misleading at best.

This seems contradictory—if it can’t survive in an emergency, it doesn’t seem like a reasonable strategy.

> But breathlessly calling out the headline debt number without acknowledging that vehicle debt is a reasonable strategy for a rental car company is misleading at best.

Shouldn't the conclusion be that it isn't a reasonable strategy if it causes the company to fail after a couple of months of significantly reduced demand? This global situation is awful, but it's far from unforeseeable.

Why should companies plan to weather this kind of thing? Honestly, holding huge amounts of savings is a suboptimal deployment of capital virtually 100% of the time.

Huge amounts of savings? It has only been a few months, and surely that would be considered an extremely tiny runway for a large national or international corporation.

But sure, if government bailout money is there for the taking, obviously many large companies won't plan for it.

That still doesn't explain the large gap between debt and market cap mentioned in the article. If the debt was all tied up in car assets those would balance out or even lead to a positive market cap difference assuming they can generate profits from renting the cars.

Equity holders stand to lose everything if the company goes south, so if there's so much debt that the future of the company is at risk, there's something call "cost of financial distress" that reduces the value of holding that stock

If most of the debt is in the cars and the used car marked is dry, why Hertz failed to re-negotiate the loans? Or has they entered bankruptcy to put extra pressure on banks?

I assume they’re secured loans, so the lenders would rather repossess the cars in bankruptcy and sell them themselves rather than support unsecured holders. If not secured, I have no idea.

Bankruptcy is a legally standard way of doing that. Chapter 11 can result in creditors being forced to take losses.

I'm guessing they probably get very good deals on the debt to begin with, (even a consumer can often get 0% on a single car) but bankruptcy will definitely restructure that debt at a minimum.

The airline industry has a similar model.

Fortunately, there is no Uber for airlines, making them much less susceptible to the kind of secular trends Hertz was facing pre-COVID-19.

there has been a lot of talk about COVID19 leading to an implosion of used car values, this is affecting big automakers who have large lease portfolios, Ford and GM each are well past twenty billion here so I expect Hertz cannot be helped by this pressure

> there has been a lot of talk about COVID19 leading to an implosion of used car values

I don't get that. Surely people still need to travel, and are less likely to take public transport, wouldn't that drive up demand rather than drive down?

OK people might not be commuting 5 times a week, and perhaps doing fewer miles overall, but you'd still need a car.

If you live in a walkable city, then your requirement for a car hasn't changed if you are no longer walking/subwaying to the office

It depends on what segment of the car buying populace you're looking at. I work in the used car sale industry, and our business has been pretty flat over the past couple months. The companies I work with typically do the no credit check "buy here pay here" subprime financing thing. Defaults and repossessions have always been common in that segment, and the typical customer is working a job that has been part of the essential group (a lot of lower paid food/service work).

Those with good credit and a reliable if not older working car probably aren't buying cars much right now, but these people definitely are.

I'd guess that most used car sales are to people who already owned a car rather than first time car owners. Given less usage and an economic downturn people are going to be more likely to just keep their existing car for longer. And households with two cars won't bother replacing one even if it breaks beyond repair.

> Surely people still need to travel [..]

They might not be allowed to...

Data point: I have two vehicles parked outside the house right now, I have purchased exactly one tank of fuel for each of them since the start of March.

More people are going to drive their cars until the wheels come off. For many, upgrading their car means going from a used car to a slightly less used car. Those sales are on hold now.

40 million people in the U.S. are unemployed right now and are not likely to buy a new car.

Hence buying a used car instead...

My understanding with americans is that having a car is more essential than having a house

Most people who need cars have cars, and are putting less wear on them right now.

Two working people may need two cars; two unemployed people need one or zero cars.

You can sleep in your car but you can't drive your house.

Maybe we will get another "cash for clunkers" program out of this.