Hertz Gives Investors the Silent Treatment on Prospects

(Bloomberg Gadfly) -- If you need an example of corporate opacity, look no further than Hertz Global Holdings Inc.

The auto-rental company has drawn criticism for depriving investors of earnings guidance or really any pertinent forward-looking information. This generally gives a bad impression, leaving bond and stock investors to imagine the worst. Or maybe not the worst -- its stock has plunged 87 percent in the past three years and nearly 16 percent since the beginning of May, when it reported disappointing first-quarter results and gave no sense of future performance.

Its latest move, however, went beyond the pale: Hertz disclosed that it wasn't going to use the proceeds of a recent sale of senior debt to buy back existing, subordinated bonds -- thus improving its capital structure -- as it had indicated. It did so in the late afternoon of a sleepy summer Friday, which is a red flag by itself. It didn't give a plan for what it was going to do with the $1.25 billion it ginned up from the senior bond sale less than two months ago, nor did it explain what led to the timing of its decision.

"They blindsided people," noted Joel Levington, Bloomberg Intelligence's global director of fixed income.  

The reaction was fierce. Shares plunged by the most this year, more than 19 percent, and bonds fell by more than 3 percent. It's almost getting to the point at which investors could be forgiven for finding its debt alluring, with its notes maturing in 2022 yielding more than 9 percent, substantially higher than similarly rated debt.

Almost. The problem is this company is unusually secretive and has done little to alleviate investors' insecurity. Hertz has struggled for the past few years after paying $2.6 billion to buy Dollar Thrifty in 2012 and failing to integrate the two businesses successfully, as my Gadfly colleague Tara Lachapelle has pointed out. And now it's grappling with declining used-car values, which makes it difficult to monetize its aging fleets or upgrade them to more attractive vehicles.

One bright note came about a month ago, with news that Apple Inc. was working with Hertz to test self-driving technology, but the lucrativeness and timeline of that agreement is unclear. Barclays analyst Brian Johnson just cut his rating on Hertz to underweight on the expectation that second-quarter results will be a "sharp miss." 

Meanwhile, it's difficult to see why anyone would want to buy Hertz's debt without a fuller explanation of what the company plans to do with its latest capital raise. As Hertz prepares to release its second-quarter earnings report next week, this is the time for investors to demand more insight into its business plan. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

To contact the author of this story: Lisa Abramowicz in New York at labramowicz@bloomberg.net.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net.