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The Hertz Story Isn’t What You Think (epsilontheory.com)
252 points by erentz 35 days ago | hide | past | favorite | 132 comments

See also the concurrent but slightly older Hertz thread: https://news.ycombinator.com/item?id=23375733.

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.

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."


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.


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

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.

> 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.

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.

>These “activist investors” have singular goal of short term profits while killing perfectly good companies.

Despite the 3rd party transactions being ethically dubious, Icahn lost a bundle on his equity, so I'm not sure there was much "short term profit" earned here.

If this were true you could make a killing betting against activist investors. I doubt you would succeed.

Only if you have the same pocketbook. See the Herbalife short squeeze for how many zeros it takes and how many years it can last. There's a reason they call market manipulation "billionaire's poker".

Not everything that's good for society is profitable, especially in the short term.

I don't think you are understanding that comment correctly. Its not making a moral argument at all. It's making an argument regarding the business outcomes of PE. He's not saying it's good or bad either way. He's saying a simple piece of deductive logic proves it isn't fully correct.

How much did Icahn lose on his equity position in Hertz? If he owned 39%, that loss would have been on the order of a billion dollars.

So there's probably more to the story than your comment suggests.

Oh, there's a hell of a lot more to the Icahn story than just this one idiot move. https://en.wikipedia.org/wiki/Carl_Icahn

Yes - he did lose a lot of money, but please understand he was in the process of sucking the company dry when the pandemic hit: https://www.cnbc.com/2020/05/26/carl-icahns-bet-on-hertz-goe...

Icahn lost roughly $1.6 billion on his equity stake.

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.

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.

It's not inevitable at the time when the debt is raised that it will be unserviceable. The creditors will have a view on whether the firm can service the debt, but typically that doesn't incorporate a complete cessation of business due to a global pandemic.

Whether in the larger picture the creditors are getting paid enough to take on the risk is an interesting question. My guess is that they don't take enough account of a scenario where many bankruptcies happen at once.

in a lot of cases, the people in charge of those loans are self-dealing and don't give a shit if the company they work for loses money on it.

That's what the savings and loan crises was about.

The debt probably has seniority over other obligation and can be recovered from the remaining assets.

The modern day "corporate raider".

He's actually the original corporate raider. He got lots of press in the 1980s.

Yeah Carl Icahn really got Hertz's ass by losing over a billion dollars of his own money.

His formula didn’t account for the pandemic variable. Otherwise, everything was going to plan like it has before with his investments. Yeah, he lost money. But that doesn’t mean he was not doing his usual schtick when it comes to loading up the companies with debt.

There is a law against this (it is called fraudulent conveyance).

And most activist investors don't plan to lose all their money. I don't know where this meme comes from but investor's interests are totally aligned with the company (Ichan lost nearly $2bn here...how much did the CEO lose? The article says they bought a few shares that didn't go up...oh, won't someone think of the poor CEO).

You can't "transfer their assets out" if you are an investor or "load them up with debt"...that just isn't how corporations work (most activists have non-controlling stakes).

The issue, and the reason activist investors exist, is because the interests of management are usually not aligned with the company. Most of these companies are vulnerable because they are poorly run. If you want to criticise them, you have to start by saying that you think managers are never wrong and shouldn't be accountable to do the people that pay their wages...go ahead (bear in mind, former managers at Hertz committed accounting fraud and the reason Icahn came on board was massive market share loss).

The interests of investors are actually not aligned with the company. They are just misaligned in a different way from management.

To give a classic and well-known example, consider the type of investor known as "venture capital". Their interests are to make sure that the founders don't run off with their money, and to have the company "swing for the fences" to have a shot at outsized returns. If all of their companies do this, the ones that succeed pay for the majority that failed.

But it is typically in the company's interests to be more conservative. To take guaranteed growth over a lottery ticket for stellar growth.

Now consider this case. Ichan has an incentive to fix management fraud (this aligns with the company), to increase volatility to increase the odds of a good payout (loading the company with debt does this), and to have the company do business with his other businesses.

About 1.5 of these incentives align with the company's interests. (The first and half of the third.) The others do not. And the second in particular is close to the misalignment that venture capital has with startups.

Wow. That is a really complicated way of thinking about it.

Icahn had nothing to do with "loading the company with debt"...again, he didn't have a controlling stake, he didn't have a majority on the Board (iirc)...the reason they used a lot of debt is because they own a lot of vehicles (the majority of their debt is secured). The reason he came to the company wasn't financial structure (that does occur but very rarely...again, most investors don't want to lose all their money...this isn't a hard point requiring maths) but chronic mismanagement and huge market share loss. He didn't increase volatility (every other company in the sector uses the same kind of debt).

No activist investor acquires a company so that they can do related-party transactions. Again, they often don't have a controlling stake. Icahn owns about $50bn worth of businesses, it would not surprise me if one of his companies does business with Hertz...but there is no way that he can control this.

Btw, if you are an activist and you acquire a reputation for doing things that hurt other shareholders (related-party transactions would be an example) then you will lose your ability to run these campaigns overnight. Activist investing is based on appealing to other shareholders and being able to make changes that produce results.

Again, all of these errors seem to arise out of not really understanding how companies work (unsurprising given your confused take).

I don't understand your point about: it is in the company's interest to go for "guaranteed growth"...no growth is guaranteed, you aren't buying a washing machine...and if a VC goes for growth that isn't profitable, they lose everything. Again, this isn't confusing.

The point that you appear to be referring to, but didn't quite get, is that VCs often aren't aligned with companies because they often don't care whether they succeed or fail. Investors have everything at stake. VCs just have an option on that stake. That doesn't really apply here. Icahn has all of his own money invested.

Icahn has multiple investments. If he loses everything from Hertz, he is still remains one of the 25 richest people in the country.

Secondly the VC issue isn't because VCs are not investors - they are. It is because VCs spread their money around and know very well that their investment returns depend on getting a home run or two. Gambling on high risk, high return strategies is therefore in the VCs interest, but not in the interest of people whose net worth is almost entirely in the company. This dynamic is widely understood and is a common source of conflict between VCs and founders.

Thirdly related-party transactions are not necessarily a bad thing. I listed it as half in the company's interest. It is very good that when the company needs to do business they have someone to call who can make deals happen. But the activist investor isn't always acting in the company's best interests.

That said, you are correct that Icahn was not the one who loaded Hertz with debt. (That restructuring happened in 2005 when Ford sold it to investment bankers.) But he has his own history of loading companies down with debt ever since he bought TWA back in the mid-80s. So the fact that he didn't do it to Hertz doesn't change the fact that he has proven willing to do so in the past.

I have no idea what Icahn is or isn't responsible for, but when you say "every other company in the sector uses the same kind of debt" it's obviously failing to address the topic at hand being Hertz failing unlike other companies in the sector. People I think are reasonably sensible and not particularly out to blame Icahn seem to think something was different about their debt. Something was obviously different about something.

A company does not have any interests since it's not sentient. A company serves different stakeholders, most importantly, customers, employees (which includes management) and owners, which for large companies is typically an enormous and diverse group, including VC, activists, passive absentee owners and usually also management.

Your story that some activist or VCs don't act in the "companies" interest doesn't make much sense. At most you could say that some owners have different interests than others.

Short version, the interests of VCs are for higher risk than is in the interest of people whose lives are invested in the company. (Because the VC can spread risk across multiple investments, while the people in the company can't.)

For modern large companies, employee tenures are typically only a few years and passive ownership (typically via investment funds) even shorter and more diversified, so I don't know which people you're talking about who have their whole life invested in a single company. VC aren't really interested in mom and pop restaurants and flower shops.

Clarification. VCs invest in startups, not "modern large companies". (Getting a modern large company would be the hoped for outcome, not starting place.)

While it is true that the people working there generally move on after a few years, it is also true that founders and early employees dedicate their lives to the startup.

If your main claim is that VC interests are not fully aligned with founders or employees, sure, probably, but I don't seen any party having claim to some moral upper ground.

If you're talking about SV style VC backed startups, It's not evident at all to me that VCs are seeking higher risk than founders seeking VC financing or early employees seeking significant equity stakes. Furthermore, they only dedicate a large part their lives to the if it looks like it's heading towards a big payoff, otherwise that dedication is limited to a few years at best.

The interest of the company is obviously it's continued existence. There's a debate to be had as to whether that vague goal is even worth considering, given that it does not perfectly align with the interests of any actual human being, but it's clear what was meant by that turn of phrase.

I think there is a difference between the truism that the companies which exist are the ones that didn't destroy themselves, and ascribing an "interest" to a company.

Similar to the shortcomings of treating evolution as having a goal.

I'm not going to write an essay on it right now though.

Continued existence is the only goal that you can ascribe to evolution though. Sure, it's not a guided intelligence, just a tautology: existence is success. Fail to exist and you're no longer part of the process.

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.

I particularly dislike headlines and articles that presume to know what the reader is thinking or doing, in order to presumptuously tell them they're "wrong".

Sometimes you don't really care or are uninformed about a topic, in which case you can't be said to have arrived at the position of being "wrong".

Other times it's a subject you deeply care about, have investigated, and you either agree with the author or don't, but you probably can't really be said to be "wrong" in either case without further context.

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.

Do companies really have any other choice but to hand out a bunch of cash to senior management? Nobody really wants to hang around and go down with the ship, but someone has to stick around to manage the reorganization. These weren't bonuses to "walk away" with cash, these were bonuses for them to stick around.

Where else were they going to go right now? The entire auto industry, and especially the rental side, are effectively stalled and not hiring new people. In a normally functioning market I would agree with you, but in this case it really comes across as a ridiculous and needless handout.

Maybe the market downturn can account for why these bonuses are less than we normally see. But these are senior execs we're talking about; it is not uncommon for them to switch industries. Their job specialty is managing a company, not renting cars. The current Hertz CEO has only been in the car rental industry for two years.

I'll repeat the question then - where are they going to go? Unless you think all of them could transition to SaaS companies I'm not seeing how it's relevant that they're senior execs.

Their current CEO spent 28 years at Walmart, and Walmart (as well as several other retailers) has had great financial performance recently.

Or many of them could probably afford to sit on their butt at their beach home for a few years and ride out the recession.

I don't see any reason why they couldn't work at a SaaS company though. It's relevant that they're senior execs because their job position is so far removed from the actual product that they really only need a general understanding of it.

I'm going to guess you've never seen how senior executive recruiting actually works. I regularly work with senior-level executives in automotive, tier 1 supplier, and software companies and can tell you for a fact that right now these people would not easily find jobs anywhere else. Without the retention payouts their options would have been 1) keep working through the wind-down and receive their normal level of pay and benefits or 2) have no job and get the 55k/yr equivalent in unemployment with no benefits. I 100% do not believe very many, if any, would have opted for the latter option and sitting around on the beach. This payout was unnecessary.

> 2) have no job and get the 55k/yr equivalent in unemployment with no benefits.

... plus income from directorships, investments, etc.

People with high net worth don't need to rely on consistent income the way the rest of us do. A lot of them are later on in their careers and could potentially retire as well.

There are other options too, like quit and become a consultant, which is exactly what Marinello did.

It is very common for senior management to run to the door during a bankruptcy, even during an economic downturn. If there's any argument that this payout is unnecessary, it is that senior management doesn't really care about the money as much as it is about the situation.

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

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

> walking away with millions

I was referring to their normal compensation, should have made that clear.

According to the article the CEO got $700k from the $16MM, and her 2019 cash comp was $3.6MM.

If there isn't we should make one up. You get to call the dibs.

EDIT: if you're going to neglect your duty I will seize control and dub this type of story "an EllieKelly story".

The only thing I could think of was "doubtmaneuvered" but I've always wanted to have a wikipedia article so I certainly won't say no to becoming part of internet lore :)

It brings to mind the early 2000s MTV show Diary, which always led with the tagline "You think you know... but you have no idea"

There's probably some German word for it, like Schadenfreude

Ben Hunt and Epsilon Theory is a good blog for that. Their take on financial markets as behavioral psychology is ... interesting if incredulous at first.

In journalism that's sometimes called a zinger lede.

Under promise, over deliver

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.

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.

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

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).

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


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.

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.

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.

This story makes me recall Hertz $32M Accenture website services bill. https://www.henricodolfing.com/2019/10/case-study-hertz-acce...

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.

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


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

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.

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.

> 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.

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