By Nora Naughton, Matt Wirz and Cara Lombardo
Years before it was forced into bankruptcy, Hertz Global Holdings Inc. decided to replace a fleet that was becoming a turnoff to customers.
Because Hertz was strapped, it bought what was cheap and available, doubling down on sedans instead of the SUVs customers wanted. "The fleet had aged to the point that we had customer mutiny," said former Hertz Chief Executive John Tague. "We were solving the biggest problem, but not solving all the problems."
That decision was emblematic of a series of strategic missteps and other blunders that kept Hertz behind competitors and buried under debt. The downturn caused by the coronavirus was just the icing on the cake. Hertz on Friday filed for bankruptcy protection.
The pandemic's economic fallout has triggered a wave of bankruptcies, including chapter 11 filings in recent weeks by energy companies and retailers such as J.C. Penney Co. and Neiman Marcus Group Inc. It has pushed more-stable companies to preserve cash and go deeper into debt to shore up liquidity.
In many cases, the companies in the most trouble today are those who were also in the most trouble yesterday. The pandemic means muddling through is no longer an option.
The crisis has battered the whole rental-car industry with a plunge in bookings. Hertz was more vulnerable than competitors, having borrowed about $19 billion directly and through a series of complex financial transactions. In addition to its sedan commitment, the company was held back by its troubled 2012 acquisition of Dollar Thrifty and efforts to move into the leisure-traveler market, a niche dominated by Avis Budget Group Inc. and Enterprise Holdings Inc.
Hertz's collapse is among the highest-profile corporate defaults from the pandemic's impact on air and ground travel. "All the money spent on overpriced mergers and acquisition, the questionable fleet management," said Glenn Reynolds, co-founder of research firm CreditSights, who has covered Hertz for more than two decades, "it caught up with them."
Hertz was already struggling to fend off threats to its business from Uber Technologies Inc., Lyft Inc. and other ride-hailing firms. And its better-capitalized rivals, Avis and Enterprise, moved faster to update technology, refresh their fleets and rebalance offerings with SUVs, analysts and former Hertz executives said.
At its 2014 peak, Hertz's market value was above $14 billion, about twice Avis's. It hovered around $2 billion for the past few years until the threat of bankruptcy sent it below $500 million, while Avis's market value stands around $1 billion.
"With the severity of the COVID-19 impact on our business, and the uncertainty of when travel and the economy will rebound," Hertz CEO Paul Stone said in a written statement late Friday of the bankruptcy filing, "we need to take further steps to weather a potentially prolonged recovery."
Hertz has cycled through four CEOs in less than a decade. The latest change came this month when Kathryn Marinello, its CEO for three years, clashed with her board over corporate strategy, according to people familiar with the matter. and was replaced by Mr. Stone, who recently ran Hertz's retail operations for North America.
The 102-year-old company began as a fleet of 12 Ford Model-Ts in Chicago and helped pioneer the rental-car business. It was originally known as Rent-a-Car Inc. By the 1970s, Hertz was a household name. With its airport counters and yellow logo, it was the go-to for a reliable base of business travelers.
It went through owners including RCA Corp. and Ford Motor Co., which sold it in 2005 to a group of private-equity firms led by Clayton Dubilier & Rice for $5.6 billion. The transaction saddled the company with more debt. A year later, the sold out their investment via an initial public offering.
By 2010, with the economy rebounding from the financial crisis, then-CEO Mark Frissora, who led the company through the downturn, decided to expand into the market for leisure travelers. After a two-year pursuit and a bidding war with Avis, it acquired Dollar Thrifty Automotive Group, which specialized in tourism and rentals covered by auto insurers, for more than $2 billion.
To pay for the deal, Hertz borrowed heavily in bond markets, increasing its corporate debt by about 50% to $6 billion, financial filings show. Integrating the companies was fraught, not only failing to deliver promised savings but also costing it money, analysts, investors and former executives said.
'Lot of confusion'
"There seemed to be a lot of confusion on everything from pricing to fleets to locations," said Michael McDowell, a former longtime Hertz manager who worked in e-commerce for the company until early 2019. "It was a big distraction trying to figure out how to put it all together, much more than anyone imagined."
Mr. Frissora stands by the move to acquire Dollar Thrifty, his spokesman said.
Toward the end of Mr. Frissora's tenure, Hertz made another major change: It decided to hold on to the company's rental vehicles longer, hoping to extend their life cycle by putting them in discount-brand fleets as they aged. This move also delayed the vehicle depreciation and gave a temporary bump to Hertz's financial results, analysts said.
The change backfired. Customers complained about the condition of the fleet's older vehicles, and many defected to Avis, analysts and investors said.
After the debt-fueled Dollar Thrifty acquisition, Hertz had little capacity to borrow, so it turned to one of the more arcane corners of Wall Street, the market for asset-backed securitizations, or ABS, which was reviving from a long hibernation after the 2008 credit crisis.
Investment banks created financial trusts for Hertz to issue bonds that bought vehicles, which were leased back to the company. The bonds had much lower interest rates than Hertz could borrow at because they were backed by the cars and had high credit ratings.
Activist investor Carl Icahn disclosed a large position in Hertz's stock in August 2014. Its share price, though around what would be its peak, had been dented by accounting irregularities. Mr. Icahn pressed for a change in management, citing the accounting and operational problems.
Mr. Frissora stepped down in September 2014. In 2015, Hertz restated three years of earnings, which it later said cost it $200 million. The Securities and Exchange Commission fined Hertz, which didn't admit wrongdoing, and the company later sued Mr. Frissora and other executives to claw back millions of dollars in compensation from them tied to the accounting. The case is pending.
Mr. Frissora, now a private-equity adviser, through his spokesman denied wrongdoing. The spokesman said Mr. Frissora presided over operational improvements and blamed Hertz's decline on the executive churn following Mr. Fissora's departure.
As part of a settlement agreement to avoid a proxy fight, Hertz gave board seats to three of Mr. Icahn's representatives, who helped recruit Mr. Tague as CEO. When Mr. Tague stepped in at the end of 2014, Hertz's rental-car fleet had aged significantly and the company had lost at least three quarters of its staff in moving its headquarters from New Jersey to Florida, according to analysts' estimates.
Mr. Frissora's spokesman said the move was part of the then-CEO's plan for integrating Hertz with Dollar Thrifty, and that it made economic sense at the time.
Mr. Tague, now a private-equity adviser, said he felt the move was a distraction, as he had trouble recruiting a new staff and lost institutional knowledge. A former United Airlines Inc. executive, Mr. Tague said he spent much of his tenure fixing operational problems including the company's fleet while hoping to lift results by applying an airline-like approach to pricing, where customers paid a lower price for the rental car but extra for add-ons.
Mr. Tague's efforts didn't impress investors, and he disagreed with Mr. Icahn on how to prioritize the threat of ride-hailing firms like Uber and Lyft, he acknowledged.
"I believed that our greatest threats were internal," Mr. Tague said. "We had to address those before we got to the external threats."
Hertz continued aggressively borrowing in the asset-backed securities market, issuing riskier bonds to raise more money per car starting in 2015. Its traditional rating firm, Moody's Investors Service, didn't rate the new "Class D" bonds highly enough, and Hertz turned to a competing firm, Fitch Ratings, to rate the debt instead, a former banker who worked on Hertz ABS deals said.
By the time Ms. Marinello took over in 2017, the company had $13.5 billion of debt and was falling further behind on technology. As more customers were opting for SUVs, Hertz had too many fast-depreciating sedans it needed to sell. She executed a turnaround plan aiming to take Hertz "back to basics" and pushed to work with ride-hailing companies.
Hertz under Ms. Marinello continued to lean on asset-backed debt to fuel growth, increasing ABS borrowing by about 40% to $14.4 billion over the past two years, according to financial filings.
By early 2020, after four straight years of net losses, Hertz saw revenue increase 6% in the first two months of the year.
But as the virus outbreak grounded thousands of flights and travel lockdowns became widespread in mid-March, the company found itself in survival mode and laid off 10,000 employees in North America.
Hertz's undoing, in the end, wasn't only the pandemic but also its dependence on financial engineering: In April, it faced a roughly $500 million payment to ABS bondholders, a figure that ballooned as used-car values dropped. It had about $1 billion in cash on its books, and its board faced a choice: Preserve cash or pay.
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