Hertz, creditors in standoff over vehicles

Bankrupt Hertz Global Holdings and its bondholders are squaring off over how to shrink its nearly half-a-million vehicle fleet. Market watchers say the outcome could upend the multi-billion dollar leasebacked ABS industry.

The cars are housed in an entity linked to Hertz’s asset-backed securities and leased to the rental giant. Normally, when a company with

ABS files for bankruptcy, it must choose to confirm or reject the entire master lease tied to the debt. If it keeps the lease, it has to continue making payments on the vehicles as it offloads them piecemeal. If it walks away, all of the collateral is liquidated to pay back bondholders.

Hertz wants a judge to allow it to convert the master lease into 494,000 separate agreements so it can reject the terms on 144,000 vehicles. That would allow Hertz to save roughly $80 million a month while it hangs onto the remainder of the cars as it seeks to emerge from bankruptcy a viable company. If the motion fails, Hertz may press for a reduction in payments to creditors, according to people familiar with the matter.

The standoff raises the stakes in what is already 2020’s largest corporate bankruptcy. Hertz is seeking to avoid liquidation and strengthen its balance sheet via the restructuring, while bondholders with billions of dollars at risk who’d grown confident of their chances of being paid

back are now threatened with losses. Moreover, industry insiders worry that if Hertz is successful in court, it would re-define the rules that have long governed the ABS market.

“It’s going to be a real

showdown,” said Philip Brendel, analyst with Bloomberg Intelligence. “Hertz is taking an aggressive posture, but if it rejects the master lease, it doesn’t have a fleet and this bankruptcy looks more like a liquidation.”

Hertz almost certainly doesn’t want that to happen.

Yet neither do its ABS

creditors. For them, the best bet for maximizing the recovery on roughly $11 billion of bonds would be to have Hertz make lease payments on all the vehicles while it sells them gradually, using its industry connections to command top dollar.

With that kind of leverage, Hertz may try to extend a 60-day postponement on its lease payments

due to expire later this month. The company may also press bondholders to accept less going forward, said three of the people familiar with the matter who asked not to be identified discussing private negotiations.

Still, bondholders may not be willing to give in so easily. A resurgent usedcar market has strengthened

their hand in recent months, making the threat of Hertz rejecting the master lease in its entirety less ominous. Used-vehicle prices in the first 15 days of June were up 6.6% over May and 4.4% above the same period in 2019, according to Manheim, the nation’s largest used-car auction.

Hertz didn’t respond to a request seeking comment.