
The Hertz Story Isn’t What You Think - erentz
https://www.epsilontheory.com/the-hertz-story-isnt-what-you-think/
======
dang
See also the concurrent but slightly older Hertz thread:
[https://news.ycombinator.com/item?id=23375733](https://news.ycombinator.com/item?id=23375733).

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ralph84
A lot of the Hertz articles, including this one, fail to call out that the
vast majority of Hertz’s debt is vehicle debt. 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. 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.

~~~
raincom
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).

~~~
danesparza
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. :-)

~~~
curiousllama
"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.

~~~
perl4ever
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.

~~~
curiousllama
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.

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sytelus
Classic story of how “activists investor” like Carl Icahn are sucking out
blood out of perfectly functional companies. You find vulnerable companies,
load them up with debt, transfer their assets out and then have them declare
bankruptcy. These “activist investors” have singular goal of short term
profits while killing perfectly good companies. There needs to be laws to put
these people in jail.

~~~
cortesoft
What I don't understand is why lenders keep funding debt for the companies
when they are just going to declare bankruptcy. You would think creditors
would get wise to the scam.

~~~
adventured
The loss Hertz was producing wasn't outrageous compared to their sales and
operating income (2019: $9.8b sales, $759m operating income, $805m in debt
interest expenses). If you're Hertz you can make a very good case that that is
a situation that can be managed, as they had been producing some growth over
the prior years as well. Operating income had gone from $167m to $442m to
$759m. It looked like they had a solid shot at climbing above the killer debt
interest costs in 2020.

They were clearly in trouble, however the pandemic is what buried them.
Lenders didn't see that coming.

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elliekelly
Is there a word for when a headline and maybe even the first few paragraphs of
an article makes you roll yours eyes but by the end you think the author has
made a pretty good point?

I think that genre is my favorite.

~~~
ccostes
Agreed, the "if anything management is getting screwed here" got me good.
Still not convinced management, who walked away with millions in cash, got
screwed, but it was a well-crafted article.

Edit: I should clarify that by "walking away with millions" I was referring to
their normal cash comp. 2019 CEO cash comp was $3.6MM, and she got $700k as a
retention bonus.

~~~
tadfisher
$16 million over 340 employees (if you believe the article) is $47,058.82 per.
Not exactly a golden parachute if you ask me.

~~~
ideals
Assuming even distributing of funds among those 340 people is a little hard to
believe as well.

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ChuckMcM
My understanding of Hertz was that they could model the revenue a new car /
equipment could generate vs the cost of debt to buy that car/equipment and the
tax benefit of expensing that car/equipment.

As long as the net money out the bottom is positive, the more cars and things
you have to rent the more money you get per unit.

It both justifies infinite borrowing (each incremental unit is cash flow
positive) but creates extreme risk if your rental market dries up or pauses.
Pre-pandemic that was pretty much not on anyone's radar given Hertz's position
in the market.

But now you turn off the rental income and boom, those debt payments are still
due and suddenly you are bleeding cash faster than you can liquidate other
assets.

~~~
texasbigdata
Working capital management is a pretty common operational stream line
technique private equity firms use post acquisition to improve returns.

This is a bit esoteric but next here's the funny part. The definition of
working capital is commonly (and I would argue incorrectly) current assets
minus current liabilities. In the alternate definition, it goes non-cash
current assets less non-debt current liabilities. Because with the alternate
definition you're not incentivized to push down your cash balance
artificially.

This probably isn't a huge reason Hertz struggled, but having more cash on
hand always helps.

~~~
ChuckMcM
There is speculation about whether or not Hertz will flood the market with
used cars as they dump assets to manage cash flow.

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H8crilA
Oh my, if people are so surprised and "demand to know the truth™ " about a
single, shitty, over-leveraged company - let's wait for the rest of the year
and then 2021 for all the other bankruptcies to unwind. The "middle class"
will be ripping all of their hair from their heads.

Just ~two months ago they couldn't sell even the treasuries! The best credit
paper in the whole world! Corpses will be flying left right and center, you
don't just pretend things like that never happened and continue happily ever
after.

It is always the same reason: too much money/credit. It was the same in 2008,
it was the same in 2000, it was the same in 1987 (okay, maybe this one was
more on the "quants" of the day with their insured portfolios), it was the
same in 1968, it was the same in 1929, it was the same in 2012 in Europe, it
was the same in Japan in the 80s, etc. It's literally that simple: too much
money = problems down the line. The only variables are how much is too much
(above all time highs in corporate debt is almost certainly too much) and how
much more down the line (seems the treasury bond market cannot be much more
clear on this issue; also look at the GDP prints and projections).

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batoure
You know something I am surprised isn't being brought up is the failed
Accenture infrastructure rebuild

[https://www.theregister.com/2019/04/23/hertz_accenture_lawsu...](https://www.theregister.com/2019/04/23/hertz_accenture_lawsuit/)

not so much the money aspect of this, but instead worth knowing that Hertz had
massively eol ready digital infrastructure in need of being replaced.

One has to wonder if this failure created a disruption to business cadence
that put them in a particularly weakened state facing these times.

~~~
eigenvalue
One wonders why any of these big companies hire consultants like Accenture.
It's basically giving them a license to steal. They would probably be better
off finding a scrappy startup trying to compete with them with technology and
copying their modern systems, spending their efforts in write code to migrate
data from the legacy systems to the modern ones.

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smachiz
This doesn't compare debt to similar companies. Avis has around $15B in debt.

Agreed the management bonuses aren't that extravagant, but I'm not sure the
debt is either.

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rident
This story makes me recall Hertz $32M Accenture website services bill.
[https://www.henricodolfing.com/2019/10/case-study-hertz-
acce...](https://www.henricodolfing.com/2019/10/case-study-hertz-accenture-
website.html)

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rossdavidh
So, looking at a car rental company like Hertz, aren't they basically a car
equivalent of WeWork, minus the hype? With the same fundamental issue: their
customers can (and eventually will) all go away at once, while they are left
with a lot of long-term commitments to pay on what they were intending to rent
out.

Now, a properly set up rental company would have hedged this, so that in the
case their market disappears on them, they have survival money coming in from
some financial option or other. But, I'm guessing Hertz did not.

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skolega
The Hertz story reminded me of another article explaining corporate predatory
behaviour from 2018.

[https://evonomics.com/hedge-fund-activists-prey-
companies/](https://evonomics.com/hedge-fund-activists-prey-companies/)

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tomatotomato37
The corporate raider strikes again it seems. Whenever you have a Carl Icahn
type on the board you can be rest assured that both the top executives & rank-
and-file are being massively screwed over in some way

~~~
nerdponx
Let's not get confused. The top execs are getting screwed in an "I didn't get
my free ice cream" kind of way. The rank and file are getting screwed in an "I
lost my job/pension and now I can't afford my home or food" kind of way.

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dangus
Coming from a complete position of ignorance on how public companies work: I
wonder if there could be a legal framework added to allow public companies to
create a blocklist for large investors that are considered to be damaging or
abusive.

Anecdotal, but it seems like every company that has ever received the anti-
Midas Touch of Carl Icahn has had some kind of negative consequence.

~~~
gruturo
> Anecdotal, but it seems like every company that has ever received the anti-
> Midas Touch of Carl Icahn has had some kind of negative consequence.

That's no surprise - it's literally what he does for a living. He damages
companies, gets a quick payout and moves on. It may not be illegal but it's
revoltingly malevolent and sociopathic. The world would be a better place
without him and his likes.

