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(Bloomberg) -- During the depths of the pandemic, it wasn’t even clear that Hertz Global Holdings Inc. would be around today, renting out cars.It is, and the surprises don’t stop there.The winning bid from several Wall Street giants to buy the company out of bankruptcy makes bondholders whole and, even more astonishingly, recovers about $8 a share for equity owners. It’s rare for shareholders to get anything in Chapter 11 cases, let alone ones involving businesses so badly hobbled by Covid-19 lockdowns.And $8 stands out for another reason. Before day traders made GameStop Corp. the hottest stock on Earth early this year, Hertz was their plaything after its bankruptcy filing. They nailed the price, even if they don’t get new shares: every single one of them paid no more than $6.25 for a stock that even Hertz said at the time might be “worthless.”Add it all together and it’s one of the most remarkable rebounds in recent memory, which almost perfectly mirrored the wild V-shaped recovery in the U.S. economy. The company, its creditors and equity holders can thank a shockingly fast, stimulus-spurred recovery in travel demand and consumer sentiment. Even two months ago, shareholders were going to be wiped out by its bankruptcy plan, and a few days ago they were in line to get about $2.25.A global semiconductor shortage is hampering new-car sales, which is also helping Hertz. Because used car prices have spiked as a result, it can charge customers more and it’s getting top dollar when selling superfluous vehicles.“No one could have foreseen this confluence of events,” said Maryann Keller, an independent consultant who was on the board of Dollar Thrifty Car Rental, which sold to Hertz in 2012. “Who would have known that the car companies wouldn’t be able to ship cars because of a semiconductor shortage? And that it would happen as the economy is reopening and travel is rebounding.”She’s not surprised the company got intense interest from buyers. “There should be a bidding war,” she said in an interview before the best and final offers came in. “Part of it is the brand name, part of it is it’s international. They can be successful. They just have to have the right people in place.”Things aren’t perfect at Hertz. The company’s sales, which hit an annual record of $9.8 billion in 2019, haven’t returned to pre-pandemic levels. But optimism abounds as the economy booms and Americans, bored after being stuck in their homes, hit the road in rental cars.Whatever drew their attention, bankers, investors and financial advisers convened in Miami this week to determine Hertz’s future ownership. The auction pit Knighthead Capital Management and Certares Management against a group led by Centerbridge Partners, Dundon Capital Partners and Warburg Pincus.Knighthead and Certares won with a plan that values Hertz, including debt, at around $7.4 billion, according to people with knowledge of the matter who asked not to be named discussing a private deal. The proposal offers full repayment to debt holders and hands institutional and accredited equity investors around $240 million in cash and the chance to participate in either a $1.6 billion rights offering or warrants for about 20% of the reorganized company. That leaves out types like college students who speculated on Hertz after last year’s buzz on Reddit.But plenty of “mass-affluent” individual buyers -- think 401(k) millionaires and those making more than $200,000 annually -- who troll Reddit’s Wall Street Bets community will qualify.Leading up to the event, the competitors were already dangling Chapter 11 rarities like full debt recoveries and some cash for shares. The drawn-out fight was nearly unthinkable in May 2020 when Hertz hurtled into bankruptcy protection after pandemic shutdowns sent its revenue from healthy to near zero in just weeks.Shareholders usually get nothing in Chapter 11 proceedings, with all money recovered going to creditors instead. Initially that was going to be the case with Hertz, with a reorganization plan filed March 2 completely wiping out equity holders.“The upside value that everybody sees here is really a function of the company’s ability to meet its business plan projections in 2022 and 2023,” Hertz lawyer Thomas Lauria said at a bankruptcy hearing in April. “That depends on having a properly sized and aged and fleet in those two years.”And that’s where the global chip shortage could turn into a problem, if it keeps Hertz from buying enough new cars or forces it to keep buying used cars -- with their customer-alienating smells and stains -- at elevated prices. “All of the upside that people are so excited about could be lost or impaired,” Lauria said.For now, the chip disruption is a benefit. Used rental car prices were up 32% in April from a year earlier, according to Manheim, the nation’s largest used-car auction house. Not only does that mean Hertz gets more when paring its fleet, but also the company doesn’t have to depreciate the value of cars it still owns as much, which helps earnings.“The market for used vehicles recovered, which was a lucky result for Hertz in hindsight,” said George Schultze, founder and chief executive officer of Schultze Asset Management. “If it hadn’t, then the requirement that the company sell off its vehicles would have meant a haircut for debt holders even at the most senior part of the capital structure.”Hertz’s comeback, with a full recovery for bondholders after they traded around 10 cents on the dollar a year ago, “has been an amazing return” for credit investors, Schultze said.But the question is whether post-bankruptcy Hertz can avoid further surprises.“Right now you have the wind at your sails, but what happens if the next cycle hits,” he said.The case is The Hertz Corporation, 20-111218, U.S. Bankruptcy Court for the District of Delaware (Wilmington)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.
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