Shares of Hertz surged Friday on unusual plans for the bankrupt company to sell up to $1 billion in shares, a last ditch effort for it to raise capital even though the value of the stock could get wiped out.
Later in the day after the market closed, Hertz was granted approval by the U.S. Bankruptcy Court for the District of Delaware to sell the stock.
During premarket trading, the shares were up more than 70% to $3.56 before leveling off to open at $3.21 – the latest speculative surge since the company filed for bankruptcy on May 22. The stock closed regular trading Friday up 37% to $2.83. In after-hours trading Hertz was down 10%
The car rental company in a public filing Thursday asked the bankruptcy court to allow it to potentially sell 246.8 million unissued shares to Jefferies LLC.
“The recent market prices of and the trading volumes in Hertz’s common stock potentially present a unique opportunity for the debtors to raise capital on terms that are far superior to any debtor-in-possession financing,” the company said in the filing.
Hertz said the net proceeds would be used for general working capital purposes. The filing was on an “emergency basis given the volatile state of trading in Hertz’s stock.”
Melanie Cyganowski, a former bankruptcy judge for the Eastern District of New York who’s now with the Otterbourg law firm, can’t recall a company such as Hertz attempting to take such actions during her 14 years on the bench or since then.
“They’re trying to take advantage of market opportunities, which is unusual because I don’t remember that many debtor stock prices that surged at least in the beginning of a case,” she told CNBC. “If you’re buying this stock, you’re buying it as a day trader … you’re not buying it because you’re investing in the debtor.”
The stock also could be delisted. Hertz in a public filing with the Securities and Exchange Commission this week said that it has appealed a delisting request by the New York Stock Exchange.
If Hertz is allowed to do sell the shares, Cyganowski said future bankrupt companies may look at doing the same. But because of this occurring under such “unusual” circumstances, she doesn’t believe the case will set any significant precedent.
Steven L. Schwarcz, a professor of law and business at Duke University, also has never heard of a company attempting to sell shares like this unless it’s part of a plan of reorganization under bankruptcy. Doing so, he said, could complicate matters.
The controversy about bypassing a reorganization plan has previously focused on major asset sales, he wrote in an email to CNBC. “This would be a new wrinkle on that.”
CNBC’s Jim Cramer questioned the company’s plans Friday morning, relating it to a circus.
“The question is did P.T. Barnum become the CEO?” Cramer said during CNBC’s “Squawk Box.” “No, it’s someone else. How do you like that? Maybe they ought to bring in P.T. Barnum because that’s exactly what it takes to have the guts to be able to do that offering. I mean there’s a possibility that it’s worth nothing.”
The only way it works for common shareholders of Hertz is if there’s somehow a sudden surge of rental activity and the company undoes the bankruptcy, according to Cramer. The move, he said, is a positive for large bondholders because there’s more money coming in.
Cramer has cautioned investors, particularly new traders, about the risk of buying the stock of companies that filed for bankruptcy such as Hertz.
Cramer said it is “highly unlikely” that Hertz, as a business, goes away in its bankruptcy. But the company’s bondholders will be the first in line to get a piece of the post-bankruptcy Hertz. Owners of the common stock, on the other hand, “are at the bottom of the bankruptcy pecking order,” he said earlier this week.
– CNBC’s Kevin Stankiewicz contributed to this report.