Hertz bankruptcy could leave potholes in Southwest Florida economy

Hertz has traveled a bumpy road since announcing its relocation to Southwest Florida in 2013.

That bumpy road has included the resignation of three CEOs, accounting errors that forced it to correct and restate three years of financial statements and strategic missteps that led to many quarters of disappointing financial results and kept it behind its competitors.

Just as it appeared the company had turned the corner on an ambitious turnaround plan, the coronavirus pandemic hit in March, stopping the rental car giant in its tracks.

Now after more than 100 years in business the iconic company is in a fight for its very survival with a new CEO at the helm.

On May 22, The Hertz Corp. — a subsidiary of Hertz Global Holdings headquartered in Estero — filed for Chapter 11 bankruptcy protection in a federal court in Delaware.

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The protective move — which could have wide economic implications locally and nationally — came just a few days after Hertz announced the unexpected resignation of Kathryn Marinello as its chief executive. 

Paul Stone is now in the driver's seat. He most recently served as Hertz's executive vice president and chief retail operations officer for North America.

The abrupt change in leadership got mixed reactions from company and industry analysts.

The bankruptcy filing, involving only Hertz's U.S. and Canadian subsidiaries, has triggered many concerns and questions locally, from what might become of the company's multimillion-dollar, state-of-the-art headquarters to how many jobs might be be lost to what might happen with a naming-rights agreement the company signed with the Florida Everblades in 2018 that rebranded the home of the Everblades hockey team to Hertz Arena.

Now in the driver's seat:Financially troubled Hertz appoints new president and CEO

A leaner company

Jerry McHale, a nationally recognized forensic accountant and bankruptcy expert based in Fort Myers, said if a new company emerges through the Chapter 11 process he expects it to be much leaner.

"I think the corporation will survive, but the corporation that will survive will be at a very, very diminished level from where it is now," he said.

If that happens it would mean fewer jobs locally and nationally, McHale said, and a much smaller fleet, which would hurt U.S. car manufacturers on a larger scale.

"Rental car agencies in total buy about 10% of all production," he said. "So that is certainly going to make a difference in where the production levels go in the future." 

Hertz's current fleet consists of roughly 700,000 rental cars, which have greatly diminished in value due to a sharp drop in used car prices caused by a free fall in auto sales stemming from the pandemic.

"This coronavirus, what it did to the travel industry, who would have ever thought it," McHale said.

With the bankruptcy filing, McHale doesn't expect Hertz's current shareholders to get much of anything in return for their investments in the company.

"If they got anything for the old investment, it would be what I would describe as de minimis, that is to say virtually nothing," he said.

As for Hertz's bondholders with asset-backed securities tied to Hertz's fleet, McHale said he's not sure how they might fare in the shakeout.

"The bondholders have some security, but I don't know how good that security is, compared to what I would call secured lenders above that," McHale said. "It really should get interesting."

McHale said he'll continue to closely follow the bankruptcy case, although he's not directly involved in it. He described it as a complicated case that could take a year or longer to resolve. 

"My speculation is that they do grow back. It is going to be a rough road ahead, to get back to anywhere near the size they were at," he said.

Related coverage:Hertz clears one hurdle, faces new ones amid coronavirus pandemic

Deeper effects

Jim Wall, communications director for CareerSource Southwest Florida, which matches job seekers with local employers, fears Hertz's bankruptcy could have deeper effects in the region than just the potential loss of property and payroll taxes and personal spending by its employees. 

Southwest Florida, he said, could lose a strong community partner and sponsor of its regional arena. If this happens, Wall said he hopes others can step up and "answer the call."

"CareerSource in the past has called on Hertz to partner in career fairs and we were there at the beginning with family relocation assistance. Let's all do what we can to help with a speedy recovery," Wall said via email. 

This weekend, Wall planned to rent a Mustang convertible from Hertz and drive it to a local restaurant for a nice meal out as a way to support local businesses and the local economy.

"We wish Hertz all the best in a quick recovery and will be here for Hertz and all other Southwest Florida businesses with employment and training services," he said.

Hertz has received more than $10 million in incentives collectively from the county and the state for its relocation after not just meeting, but surpassing its job creation and capital expenditures requirements.

It's unclear whether the bankruptcy filing and job cuts will affect any future payments from the state or Lee County — or require Hertz to pay back any of the incentive money it has already received.

"I can tell you that as of the last site visit, Hertz was meeting or exceeding the terms of its incentive agreement. The next site visit is to be scheduled this summer," said Tim Engstrom, a spokesman for the county, in an email.

Under the agreement Hertz struck with Lee County, the company must maintain the 700 jobs it was required to create for the incentives through Sept. 30, 2020.

The county wrote its second and last check of $2 million to Hertz through its FIRST (Financial Incentives for Recruiting Strategic Targets) grant program in early 2017 after the company more than delivered on its promises.

"A compliance visit to review internal documents would need to take place to close out the grant," Engstrom said.

The county expects to pay Hertz another $42,857 in a local match to state funds as long as the company continues to meet its performance-based requirements through Florida's Qualified Target Industry, or QTI, tax refund program, he said. 

The state has doled out nearly $9.8 million in incentives to Hertz since 2014, according to a tracking portal overseen by the Department of Economic Opportunity. That's edging close to the state's maximum potential payout of $10 million.

In an email Paige Landrum, the department's press secretary, said Hertz met its requirements for both the QTI and Quick Action Closing Fund programs through 2018. 

The company received $7 million from the discretionary closing fund in 2016, awarded by then Gov. Rick Scott to seal the deal that brought Hertz to Florida.

"Hertz’s 2019 performance is still under auditor review," Landrum said.

The company, she said, will have to meet its contractual requirements to receive its final QTI refund payment from the state and to avoid any sanctions or clawbacks for failing to maintain its performance required by the Quick Action Closing Fund

COVID Cuts:Hertz cuts 10,000 employees amid coronavirus pandemic

Preserving cash

Over the past several months, Hertz has taken many steps to preserve its cash and cut its costs, including reducing its capital spending, canceling new fleet orders and shrinking its employee count.

In late April, Hertz announced 10,000 layoffs across its North America operations after most of the job cuts had already happened, including ones at its local headquarters.

Since then the number of layoffs and furloughs has grown to 20,000 employees, or  more than half of its workforce. Before the pandemic hit, the company had roughly 38,000 employees, with about 1,100 of them based in Southwest Florida.

As a result of the job cuts, former employees in the region could break their rental leases or put their homes up for sale with plans to move elsewhere for new  job opportunities. Some local real estate agents don't seem all that concerned about the impacts on Southwest Florida's housing market. 

Betty Leathers, an agent with Barclay's Real Estate Group, with offices in Naples and Fort Myers, helped Hertz employees relocating from New Jersey find homes in Southwest Florida, a move that started in 2013. She said there hasn't been much impact from Hertz's job cuts or bankruptcy on the local market yet.

"We haven't started seeing a whole lot yet," she said. "But we're expecting some fallout. But I think it will be minimal and our market is really strong right now."

Not only is there pent-up demand from home buyers who put off their purchases due to the pandemic, but a smaller inventory of homes on the market – because would-be sellers have decided to stay put for now – is keeping prices relatively stable, Leathers said.

Buyer activity has picked up dramatically in recent weeks, she said, with homes in all price ranges "moving."

Estero Mayor Bill Ribble said he's not had any communications with Hertz about its dire financial situation, but he estimates the company still has 800 or so employees in Lee and Collier counties, most of which are based at its headquarters. He said he's most concerned about losing good-paying jobs, a community partner that supports the town's charitable events and the revenue generated by its employees who shop, eat and help support other businesses in the town.

As for the headquarters building, Ribble said if Hertz is forced to move out of it or sell it he wouldn't expect the building to sit vacant for long because of its world-class design and its high-profile location, which he's sure would quickly attract interest from other users. 

"I'm not too concerned about them leaving the building," he said. "However, I would like to see them stay in place." 

He pointed to recent headlines about Hertz's administrative building in Oklahoma becoming the home for a new Costco operations center. The Oklahoman reported that the four-story office building was sold to Costco on May 21, a day before Hertz declared bankruptcy. According to the daily newspaper, Hertz laid off hundreds of its employees in Oklahoma City shortly before the Chapter 11 filing.

No better place

Stan Stouder, a commercial real estate expert and founding partner for CRE Consultants in Fort Myers, said he seriously doubts Hertz will move from its current headquarters, giving a list of reasons to support his conviction — including his belief that there's not a better place for the global company to be than in Southwest Florida.

"It seems unlikely to me they’ll walk from their impressive new facility," he said in an email. "They may sublease a portion for income or do a sale leaseback to raise capital. How that looks is too early to say."

The hardest part of running a business is finding the "right" employee, he added. 

"Hertz’s local workforce being released could be a blessing to existing local businesses small or large who can absorb these displaced Hertz employees," Stouder said.

Despite massive layoffs, Hertz has taken aggressive steps to keep its senior managers and executives.

A few days before filing for bankruptcy, Hertz agreed to pay 340 of its key employees more than $16.2 million in retention bonuses in an effort to keep them in place as the company works to navigate the "unprecedented circumstances arising from COVID-19," according to a regulatory filing.

Those payouts included $700,000 for the company's new CEO.

Naming rights

Amid Hertz's financial woes, Naples businessman David Hoffmann and the Hoffmann Family of Cos., owner of the Everblades hockey team and the Hertz Arena, agreed to allow the troubled company to store its idle rental cars on the arena grounds at no cost in April. It was yet another sign of the devastating blow of COVID-19 on Hertz — and the tourism industry.

As for its naming rights on the arena, Hoffmann said: "Hertz is paid through October," with a multi-year contract.

"All indications are they will keep paying us for the arena naming rights," he said. "We have, however, had two inquiries from large companies interested in stepping in if Hertz should decide not to move forward."

Hoffmann hopes Hertz will continue on as the arena's title sponsor. "They have been an awesome partner and very supportive of the arena and community and a real pleasure to work and deal with," he said.

Uncertainty remains

In a news release announcing its bankruptcy filing, Hertz said it had to take such a drastic action because "uncertainty remains as to when revenue will return and when the used-car market will fully re-open for sales." 

"The financial reorganization will provide Hertz a path toward a more robust financial structure that best positions the company for the future as it navigates what could be a prolonged travel and overall global economic recovery," the company stated.

The Chapter 11 filing came as no surprise, as media reports of a potential bankruptcy began to swirl in April after the company disclosed it had failed to make millions of dollars in lease payments for its U.S. rental car fleet so it could "preserve liquidity to support its ongoing operations."

The bankruptcy filing came less than two weeks after Hertz raised serious doubts about its ability to survive another year in a regulatory filing with the U.S. Securities and Exchange Commission.

In court filings, Hertz explained that it had been "prospering" with air travel at record levels in 2018 and 2019 — pointing out that through the end of 2019 it had achieved 10 consecutive quarters of year-over-year revenue growth.

That upward trend quickly reversed course when the pandemic hit.

"Whether voluntarily or by government mandate, the air travelers the company serves largely stopped flying and its local customers largely stopped driving. The effect on the company's revenue was devastating," Hertz explained in court documents.

Hertz filed for bankruptcy protection — along with a handful of its affiliates — with the stated goals of "stabilizing their operations, assessing their options and charting a course for a strong future." 

The bankruptcy filing came the same day Hertz ran out of time to reach a longer-term agreement with its lenders on how it would make up for April's missed lease payments and avoid a default that could trigger the sale of much of the company's rental car fleet. 

Hertz owed roughly $500 million to those creditors alone.

The company sought help from the federal government for the financial hit it's taken from pandemic, but it never came for the ailing car rental industry.

The Chapter 11 filing offers Hertz relief from creditors, while allowing it to continue operating as it attempts to reorganize its affairs — and giving it time to devise a way to pay back all, or at least some, of its creditors.

Saddled with debt

The publicly-traded company is saddled with a mound of debt.

According to its bankruptcy filing, Hertz has more than 100,000 creditors, with total debt that tops $24 billion. Meanwhile, company assets are valued at less than $26 billion.

As it winds its way through the reorganization process, Hertz said it expects to continue providing the same vehicle quality and selection, to continue paying vendors, suppliers and employees in the usual way and to continue its customer loyalty programs.

Hertz has more than 142 million in shares outstanding. Shareholders could be wiped out by the reorganization, while bondholders might only receive a fraction of what they're owed.

Company shares have plummeted in the wake of the bankruptcy filing.

A few days after the filing, billionaire investor Carl Icahn, Hertz's largest shareholder, sold his entire stake in the company. Icahn unloaded his 55.3 million shares at 72 cents apiece for less than $40 million, resulting in a loss of nearly $2 billion, according to a regulatory filing.

In the days leading up to Hertz's bankruptcy filing, Autoweek and Business Insider reported the company was selling off some of its more expensive cars at steep discounts, including some of its commemorative 2019 Z06 Corvettes, likely to raise cash.

In a research note, company analyst Chris Woronka with Deutsche Bank said he doesn't expect Hertz's core rental operations to "change meaningfully in the near term," particularly since the company had more than $1 billion in cash on hand when it filed for bankruptcy.

Hertz actively reduced its fleet throughout April and May to better align its operations with current demand, and for now Woronka said he doesn't have any reason to believe the company "might attempt to further accelerate the pace of those sales — particularly since efforts to avoid a bankruptcy filing have ended."

While it's too early to predict the outcome of Hertz's attempts to reorganize, Woronka said he doesn't see the "status quo being a likely outcome," in terms of its size and the scope of its U.S. operations.

"At this time, a liquidation of Hertz's U.S. business is not on our radar," he said.

Too early to call

Paul Singerman, a nationally-known bankruptcy attorney based in Miami who is closely following Hertz's bankruptcy case, said it could result in three outcomes:

• An agreement on a reorganization plan, which would likely put much of the company's ownership in the hands of creditors and other interest holders.
• A sale of Hertz's assets to another company, which would include its name and other intellectual property, such as customer lists. Liabilities would be left behind, with creditors splitting up the money generated by the sale.
• A liquidation of the company if no buyer is found.

"What will happen with Hertz, I think it's too early to tell," Singerman said. "Hertz had a great brand. It's possible that a competitor will acquire Hertz, and continue to operate it as an independent brand." 

Asked about the reasons for Hertz's downfall, Singerman said it has much to do with the amount of debt it accumulated, pointing to recent articles in the New York Times and Washington Post that traced the company's financial woes back to 2005, when Ford Motor Co.sold its Hertz rental car unit to a group of private investment firms in a deal valued at $15 billion, including around $10 billion in debt.

It wasn't long after the sale that the new owners took the new company — going by the name Hertz Global Holdings — public after only adding to its debt load, without making any real improvements.

"COVID-19 was particularly impactful for Hertz because, like other companies in the same space, Hertz had pretty much a wholesale stop, a hard-line stop on top-line revenue," Singerman said. "For a company with a lot of debt, that's very difficult to endure." 

More on Hertz's bankruptcy and be found here: www.hertz.com/rentacar/misc/index.jsp?targetPage=update.jsp.