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Comment by dragontamer | Hacker News Reader

> How was selling more stock in that situation legal?

They asked the bankruptcy court, and the bankruptcy court's job is to maximize value for the bondholders. Turns out that selling worthless stock (for money) is really good for the bankruptcy proceedings (getting maybe 70% of the money back instead of 60%).

Then the SEC came in (whose job is to protect retail investors), and the SEC told them to knock-it-off.

Different jobs for different courts and bureaucracies. Ultimately, the SEC determined it was illegal for them to proceed. But I guess the SEC assumed the bankruptcy courts would do the right thing. When that clearly wasn't the case, the SEC stepped in (a bit late: after $29 million was raised. But better late than never)

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What I don't understand is that Hertz specifically wanted to sell an amount of shares that wouldn't raise enough money to pay off their debts. Their prospectus noted that shares sold would automatically become worthless unless their debt was paid off, which they didn't anticipate.

But why not try? What if they sold so much stock that the bondholders could just be paid back? Why do the stock sale specifically planning for failure? Why include a limit that guarantees failure even if you would have otherwise succeeded?

Many would suggest that such an action you propose is fundamentally immoral.

Lets say a hypothetical company is overall $-4 Billion in debt (total assets - liabilities). You successfully raise $5 Billion from some means.

Now you're in a position where you sold $5 Billion worth of shares on a company that (by all fair evaluations) is only worth $1 Billion after the capital raise.

Plenty of companies are valued at more than 5x their assets. Tesla for example is valued at more than 10x their assets. Besides, immorality doesn't really enter into it. The SEC requires public filings to ensure investors can make informed decisions. The rest is up to the investor who presumably would be betting that the company's prospects will increase, at least partly as a result of avoiding bankruptcy an having enough cash on hand to buy some breathing room and recover. Of course, they may be wrong. But immorality only enters into it if there is deliberate deception.

Further, in the case of a company doing what you describe, they would in fact be ensuring their current shareholders, pre-$5b stock sale, don't lose all of their money.

The difference here is that the company was already in the middle of chapter 11. So there is no "avoiding bankruptcy", that part has already happened.

One common scenario for exiting chapter 11 is that you wipe out equity holders so that you can pay off your debts. (That's a major reason why stocks tend to get lower returns than bonds: less risk, less reward.) So, selling common stock like this in order to raise money is effectively robbing - or, more accurately, swindling - the poor to give to the rich, who tend to be the carriers of more senior debt. Which Hertz knew they were doing. Technically, they wrote, "We're selling you lots of $0 for the low low price of $2.50," in the prospectus, but they did that in the full knowledge that Robinhood users don't actually read prospectuses, and that Robinhood users were the only ones who would be buying these shares. So there's your deliberate deception.

The spot where they "buy some breathing room and recover" is the bit where you wipe out your equity holders in order to pay off your lenders as well as you can, restructure whatever remaining debt you have, and carry on. That's more-or-less what chapter 11 (as opposed to, say, chapter 7) is.

I was responding to a comment about a hypothetical, not this particular case. The hypothetical was a company with $4b in debt selling $5b in stock to remain operating. This is not only fine, it is common, especially for private companies where investors are betting on the future success of a company.

Even in bankruptcy, it is not uncommon for investors or banks to give the company bridge loans which the lenders knows full well might be lost if the restructuring doesn't work.

As for this case, it is not robbing shareholders. Chapter 11 is in not an automatic wipe out for shareholders, in fact you'll see other comments here about proposals for alternate plans for Hertz that would not wipe out shareholders. This is, if not common, certainly not unheard of: Restructuring a public corp and keeping it public post chapter 11 means it will still have stock on the market, and in some cases prior shareholders are able to exchanged their old shares for new ones.

It is also not robbing because even retail investors know full well what "bankruptcy" means and no reasonable person would buy this stock without realizing the significant risk for total loss. And in any case, how would Hertz selling stock, knowing the likely risk for a complete loss, be any different than some other institutional investor selling their stock, also knowing the buyer has an excellent chance for a complete loss?

Airlines are in bankruptcy a few times a decade, give or take. Doesn't stop them haha.

A more logical option is to wait for Hertz to inevitably go bankrupt, and THEN invest $5 billion into them.

Under no circumstances is it better for the new investors to pay billions before the bankruptcy.

If you mean waiting until the bankruptcy proceedings are over, then waiting isn't always necessary. Lots of investors make high risk investments to companies in bankruptcy with bridge funds to carry them through the process.

The "under no circumstances" clause is not necessarily the case. If it's a large enough company and investors can get their investments to be senior debt, then it can be a reasonable, if still high risk investment. If the bankruptcy occurs, they'll be first in line to get paid out of the remaining assets, even if they don't get everything back. If it doesn't occur, they've got a nice high yield bond. Basically there are ways for investors to make money investing in a company at any point, if done the right way. And probably equally many, or more, ways to lose money.

In the case of Hertz? Yeah, buying their stock when it went meme doesn't look like a very smart move right now. Of course the bankruptcy plan might be amended to slow redemption of old stock into new stock post-bankruptcy, but I'd say that's success by pure luck rather than anything else.

>slow redemption = "allow redemption"

> Now you're in a position where you sold $5 Billion worth of shares on a company that (by all fair evaluations) is only worth $1 Billion after the capital raise.

That's entirely reasonable if you think that by keeping the company alive you can build it back up until the point that it's worth more than $5B. This is indeed what every CEO thinks -- that they can make the company worth more next year than it's worth this year.

Hertz is going through Chapter 11 bankruptcy. It is reorganization, not liquidation. At the end of it, there would still be a Hertz company, but with new owners.

Hertz agreed to bankruptcy, so that they don't have to pay all of their debts anymore.

That's... literally what's going on. As part of the bankruptcy proceedings, shareholders usually get wiped out. They wouldn't have pushed this button unless they believed that their bonds were hopelessly unpayable.

Filing bankruptcy is not an automatic thing. Should the company, during the course of the bankruptcy, somehow manage to bounce back and obtain enough capital to remain solvent, the court may dismiss the bankruptcy since the company no longer needs legal protection to restructure its debt or gracefully liquidate its holdings.

In addition to the court finding that a bankruptcy is no longer appropriate, either the debtor or the creditor can petition the court to dismiss a bankruptcy. This is not entirely uncommon, even when a company might have more liabilities than assets, when creditors believe their interests are harmed more by bankruptcy than a less drastic measure. This avoids companies declaring bankruptcy out of convenience rather than necessity. Shareholders are themselves creditors, and so they too could petition the court to dismiss a bankruptcy under such circumstances.

Finally, while companies (mostly) won't enter bankruptcy if they see other options, bankruptcies do not automatically wipe out shareholders, though that is probably the more common outcome. It is possible however to retain your shares, which would usually be exchanged (possibly at a discount) for shares in the newly constituted company post-bankruptcy.

Or... Hertz can organize Chapter 11 bankruptcy, wipe out large portions of its debt, and then bounce back.

Bankruptcy protects the company and allows a company to come back stronger. That's the ultimate issue: with debts this large, it makes sense for Hertz to give up on its debt rather than try to pay it off.

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Its not like Chapter 11 is a death-knell for a company. GM went Chapter 11 years ago, and came back much stronger in the past decade. Bankruptcy protects the company, while (usually) wiping out the shareholders... and bondholders only getting a fraction of their promised payments back.

That's the deal: investors get screwed, but the company survives. A bankruptcy court helps decide if the case truly is as terrible as they are pleading.

But ultimately: that's why Hertz's board voluntarily entered Bankruptcy Protection last year. Its to Hertz's advantage to declare bankruptcy.

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If you have a comeback plan for Hertz, it will be an even stronger comeback plan if you wiped out a huge portion of debt. It just makes sense.

Yep, and this is in fact the type of bankruptcy Hertz is pursuing. Re-org, not a chapter 7 liquidation.

But to clarify, not all investors get screwed. (or at least not completely). Stock owners, unless they're of a class with a higher claim than normal common stock, will usually (though not always) lose everything. However, many bondholders will receive some of their money. How much is determined by many factors, including the type of bond and how senior the debt associated with it.

No, the enterprise value of the company doesn't change. It was owned by 4b of debt before and is now owned by 5b of equity, and has 1b in cash. It also has an intact business.

Under your logic no company would ever raise equity to pay off debt.

The people buying the shares are making the "true" valuation of the company, being the ones buying it.

People buying shares were acting on what they believed to be the true valuation. A big difference. Imagine two people are "long" on some stock. Person A decides to sell; They believe the true valuation is lower. Person B decided to buy more; They believe the true valuation is higher. One of them is wrong.

In this case, the buyers of Hertz stock were most likely wrong, although things are not yet finalized and another comment here notes that alternate plans are being proposed that would not wipe out share holders.

Do you think the buyers of HTZGQ at $5.50 in June 2020 will be proven correct?

Or do you think, that like most other bankrupt companies, HTZGQ will be worthless once these bankruptcy proceedings are done?

The stock is almost certainly going to go to $0. That's just what happens as bankruptcies play out. If you disagree, you're welcome to toss your money into buying some HTZGQ yourself.

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The issue is that Hertz CEOs / board / CFO have extra information and better ideas into how those bankruptcy proceedings are happening. For them to issue shares in this time is grossly immoral. Especially when they're publicly pointing out that yes, bankruptcy proceedings are carrying on as expected: shareholders are expected to be wiped out and assigned a big fat $0.

It already has gone to zero. The bankruptcy proceedings wrote off all of the old stock and issued an entirely new set of shares, mostly to the debt holders.

(I cannot reply to your response when you edit so often... looks like it resets an anti-spam timer or something)

The proceedings behind a deal at this scale are so private that it is rare to see major salient revisions after a public announcement like this. Nevertheless, I concede the point that it isn't completely final. Presumably they'll be de-listed once that actually happens.

Bankruptcy proceedings are still taking place and are not finalized. HTZGQ will probably go to zero soon, as what you say is almost certainly going to happen.

https://www.prnewswire.com/news-releases/hertz-global-holdin...

As of a few days ago, the PLAN (not yet executed) is to give Knighthead new shares and wipe out the current set of shareholders.

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There is a rival plan to keep HTZGQ shareholders alive. These sorts of plans go back and forth, discussed by the board, the bankruptcy court, and so forth to determine the best course of action.

No plan is ever 100% certain... not until the plan is executed. Still: the current plan is that Knighthead will be the new owners, old shareholders will be wiped out, and old bondholders will get 70%.

If bondholders are only able to get 70% under the current plan, it seems unlikely that any alternatively proposed plan would bring that to 100% somehow (the precondition before old shareholders of HTZGQ to get value out of this...). The plans will change, but the amount of assets that Hertz owns will not change. So I'm not entirely sure where another 500-million buckaroos will come from to make the bondholders whole.

Modern finance is a process of constantly repackaging and reselling risk from people in a better position to evaluate that risk to people in a worse position to evaluate that risk. Finally, after a dozen generations when it arrives at the people least able to evaluate the risk, it crashes to zero, followed by sympathy to the poor suckers (like your local school district) and a bailout.

Hertz just cut out the middle men here and sold directly to suckers, maybe a lot of their executives were also creditors.

Can I interest you in an Iraqi Dinar?

I'll pass on the dinars, unless they are somehow collectible.

May I interest you in some Aaa-rated subprime mortgage backed securities? How about some negative -yield bonds?

Institutions can have conflicts of interest, which individual investors can make up their own mind on. (Whether that's a winning strategy is another question, I admit)

Why especially? Pointing out that the long term value of the stock is $0 while selling it is what makes it moral IMO.

If I sell my broken car while clearly noting that it’s broken, hat makes it ok, not worse than if I’d left it out.

Do you hold this view for sellers of hertz stock that aren’t hertz? What about sellers of stock that bought the stock post bankruptcy?

Yeah, a lot of companies that enter bankruptcy end up with wiped shareholders and new owners in the shape of it's creditors. It's not really news.

Then if some idiots think it's not the case, and there is value, let them bet if they so want, they obviously know better than Hertz. Hertz only decided to issue shares when their share price went over the roof, driven by those same speculators.

As long as things are correctly disclosed ("our stock is worthless, but buy it if you want"), caveat emptor.

I'm going to start by saying that I pretty much agree with you that it's immoral to knowingly screw people over.

Now with that out of the way, I think there's more of a gray area here than you might think. While there are many situations where people enter into a transaction with the belief that it's a win-win for everybody involved, I think there are legitimate situations where you can trade with people ethically while also believing that the other person is making a huge mistake.

Bitcoin is a pretty great example of this. Suppose I'd been gifted a bitcoin in December of 2017. That was right around the peak of a huge rally for Bitcoin. If I'd sold it to someone for $15k I would have thought that the person buying it from me was an idiot. They may have thought the same of me. As long as we were honest with one another, that seems okay to me.

The situation with Hertz was just kind of weird. It's as though I was taking out the trash one day and someone walked up to me and offered me $1000 for my trash. I don't really have any strong moral intuitions about whether taking their money is okay because it's such a goofy and unexpected thing to do.

I'm also reminded of the time Stuart Butterfield explained why he felt compelled to sell shares of Slack at the generous valuations and terms people were offering to him.

> It’s pretty straightforward. I’ve been in this industry for 20 years. This is the best time to raise money ever. It might be the best time for any kind of business in any industry to raise money for all of history, like since the time of the ancient Egyptians. It’s certainly the best time for late-stage start-ups to raise money from venture capitalists since this dynamic has been around.

> And as a board member and a C.E.O., I have a responsibility to our employees, to our customers. And as a fiduciary, I think it would be almost imprudent for me not to accept $160 million bucks for 5-ish percent of the company when it’s offered on favorable terms.

That's very well explained.

I think that trips people up, in stories like this, is that the SEC has a pause button but not a reverse button. What's done is done, for the most part.

> They asked the bankruptcy court, and the bankruptcy court's job is to maximize value for the bondholders.

Perhaps the court can do this without violating the law? This is fraud.

That's not the bankruptcy court's job. That's the SEC's job.

Ever heard of the phrase "you cannot have two masters" ?? By splitting the job into two organizations, we ensure that both jobs are accomplished. Otherwise, only one job gets done (at the expense of the other).

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