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Don't look at the price action; that on its own is not surprising. Shares in near-bankrupt companies trade like options (because they are options - on the potential of recovery), with extreme volatility one would normally see in individual options contracts. The same way as bonds in near-bankrupt companies trade like stocks, largely ignoring remaining maturity, because very likely bonds will soon become stocks (wiping out the previous equity).

Look at the facts. Nobody has done this before:

> Jared Ellias, a law professor at the University of California Hastings College of Law, said he has studied hundreds of bankruptcies and never seen a company try to fund a case with an equity offering at the start of chapter 11.

> “Hertz looks at the market and sees there is a group of irrational traders who are buying the stock, and the response to that is to seek to sell stock to these people in hopes of raising some amounts of money to fund their restructuring,” Mr. Elias said.

> “It is incredibly creative and they get props for that, but I wouldn’t buy those shares,” said Nancy Rapoport, a professor at UNLV’s William S. Boyd School of Law, who said she has never seen a bankruptcy funded this way. “I guess they’re trying to catch whatever the opposite of a falling knife is.”

We are going to witness the first Initial Bankruptcy Offering in market history.

Holy I nearly choked at this comment

“I guess they’re trying to catch whatever the opposite of a falling knife is.”

profound

Ethan Hunt jumping on a plane taking off: https://www.youtube.com/watch?v=elpUGB9Ap1Y

Gromit placing rail tracks

https://www.youtube.com/watch?v=fwJHNw9jU_U

edit: and here's the full scene, greatest chase scene in cinematic history https://www.youtube.com/watch?v=jrmZIgVoQw4

Levine quipped that to be a soaring spoon.

Crouching tiger?

On the other hand, what is fairly common is for companies to get saved out of bankruptcy by outside investment, in return for equity. This is a case of that with the oddity that it happened without contact between the company and the investors.

You make a solidly good point.

So this move is a bit like... Say, crowd funding to get out of bankruptcy?

Sort of, but unlike Kickstarter if the (huge) goal isn't met, it's all lost to shareholders

Interesting argument, but I think this is somewhat different.

A bankrupt company could always offer new equity to its existing creditors as part of a Chapter 11 reorganization plan, but that's not exactly a sale. If you're describing a transfer to outside investors, then the sale of new equity could violate fraudulent transfer law and the bankruptcy trustee could try to claw it back to preserve the value of the estate. (See Bankruptcy Code § 548).

It's worth mentioning that creditors can throw an insolvent company involuntarily into bankruptcy by petitioning the court. Since creditors don't share in the upside of a company (like equity holders do), there's no reason for the creditors to let the company linger in bankruptcy so that it can gamble for its resurrection. It's in their best interest for the company to enter bankruptcy as soon as possible so they can preserve its value and maximize their payouts.

There might be edge cases (e.g. if there's a single creditor who happens to have a significant equity stake, it could play out differently) but I don't think it's the norm.

Creditors may also share in the upside of the company if their bonds are currently way underwater, e.g. if your bonds are worth ten cents on the dollar you benefit from the company recovering all the way to 10x its value. Perhaps you should have forced it into bankruptcy earlier, but it's too late now. This isn't uncommon at all, as a poster upthread described "bonds in near-bankrupt companies trade like stocks".

In this case Hertz bonds trade around 40 cents on the dollar [0], so there's a significant incentive for the creditors to let the company gamble for some upside.

[0] https://markets.businessinsider.com/bonds/hertz_corp-_thedl-...

Yes and no. If a private equity firm injects a bunch of cash into a bankrupt company through an equity buy they do so with concessions, they might get one or two seats on the board of directors, a special clause in the bylaws in the event of a company sale or acquisition, etc. In this case these investors get none of that sort of 'armoring' of their risk.

>Don't look at the price action; that on its own is not surprising. Shares in near-bankrupt companies trade like options (because they are options - on the potential of recovery), with extreme volatility one would normally see in individual options contracts.

I get your point, but it's really not correct. Shares do not have delta, gamma, vega, strike price, implied volatility or any of the other factors that go into pricing options. They are not derivatives and there is no premium. Yes, a penny stock (which is what HTZ is at this point) has extreme volatility, but comparing them to options is way off. A share represents actual ownership in the company while an option does not until it is exercised (and is then no longer an option). By your example, any stock holding would be an option on the price of the stock going up, but it's not - you already own it.

> comparing them to options is way off

Not entirely. Equity can be modelled as an option on a company’s assets, struck against its debt. This is fine for equity (and the equity component of fulcrum securities) in a bankruptcy.

If I rememberwell, this kind of strategy has a name called Captical structure arbitrage, where the most basic strategy is to traded convertible bonds. Most complex strategies include taking position on different asset class of the same company ( equity, bond and CDS).

> There is a tone of condescension against an entire generation of millennials painting them uniquely as jack-asses

This is not unique to millennials. Go back to every retail-participated bubble and you will find this condescension (and deservedly so imo). The stories of strippers in Vegas buying multiple McMansions in 2006 come to mind.

You points about relative return measures (ROI) having large base effect issues miss the point of what's going on: it's not the magnitude of the swings which are notable, but rather the circumstances around which they're occurring.

Enron was a massively complex business, and the true value of its assets was thus a massively complex question. HTZ does not enjoy this same conundrum. Other financially impaired but high name recognition names have had similar behavior (AAL, DAL, to name a few). Robinhood have lowered the bar to trading, that children are now "playing" the markets when they get bored of Minecraft and Fortnite (this is not hyperbole). And then you have one strata above who are likely the real problem and have been active in every bubble in recent memory. Financially unsophisticated adults have indoctrinated with "buy-and-hold" from the likes of Warren Buffett without understanding the edge cases likes bankruptcies (incidentally, Buffett sold all his airlines holdings which are now a retail favorite).

Simply put: people don't understand what they're doing and that's what makes this so amazing. They think "people aren't going to stop renting cars" or "people aren't going to stop flying" and so they buy the stock, cocksure that over the long-run they will be rewarded. The future outcomes of HTZ common shares is pretty certain, and not at all consistent with current retail behaviors.

> The future outcomes of HTZ common shares is pretty certain

But say they get to the point where their balance is positive because they sold a lot of stock, wouldn’t the price of that stock go back up to the original $20 (or maybe $10, since they basically doubled the amount of shares).

you're talking on a real abstract level, but what do you companies do with the money they raise on th epublic market? I see 3 broad choices: (1) return it to other investors? That would make this essentially a ponzi scheme. (2) Fund expansion in their business? In this case that would likely accelerate the rate at which they turn money into smoke. (3) Buy time to either restructure or significantly change their business model? THis what I think the new investors are betting on (the rational ones at least) but it seems like a real, real long shot, so even the most analytical is attemping to pick the trifecta.

No, there's no way to escape the laws of dilution.

Except those buying HTZ are not quite "buy and hold" people?

I assume most of them are just doing gambling. They are fully aware that HTZ is going to be worthless in near future, but they buy the share anyway because they believe they can sell it off to someone else before the last minute.

A funny thing is that if Hartz indeed issies new shares, it makes the game a lot less favorable for those gamblers...

> A funny thing is that if Hartz indeed issies new shares, it makes the game a lot less favorable for those gamblers...

These gamblers are irrational. They might double down, or manage to find new gamblers, or sell before this even happens. Nobody knows what will happen, and it doesn't really matter.

There are A LOT of buy-and-hold types in Hertz. They are still gamblers, but their time horizon is long and they are influenced by the low share price. I have a few smart, well educated friends who fall into this category.

The average Silicon Valley-Er makes $150k/yr. putting $1k into 2021 LEAP options could be worth $30k if the company makes it out of bankruptcy. I’ll turn off my servers for a month and YOLO them odds

And putting 5 dollars into a lottery ticket could turn into 40 million.

> They think "people aren't going to stop renting cars"

Do they? Nobody buying this stock thinks Hertz is going to recover.

They think "I'm bored and buying this worthless stock is risky and fun".

That is valuable to some people, and hence why the stock price is up.

Hertz selling more shares to try to save the company is pretty dumb, because that is not what it share holders want.

Hertz new share holders want to see the company and stock burn as much people as possible in the most spectacular way possible. That's what Hertz has become.

> Do they? Nobody buying this stock thinks Hertz is going to recover.

You should have a chat with them. People absolutely believe this. Same goes for airlines and cruise lines. I'm a former hedge fund trader, so I've had many of my friends come to me lately, and seek advice. I often ask how they're making money now and they say (for instance) things like "I walk/drive by Starbucks and I see people still buying coffee, so I bought SBUX". They're not doing any sort of real analysis, but their pseudo-analytic abilities are reinforced by the Fed. They don't really think that they were right because everything went up, they think it boils down to common-sense theses like the above.

The flip side is how Ford generates killer sales in China, China has the population of America in a single city, yet analysts look at a few recalls on a new model redesign and knock the shares down 50%

Common-sense fundamentals take a back seat to technical analysis and HFT algos these days

If China actually had the population of the US in a single city, they wouldn’t be selling cars. There wouldn’t be enough physical space. People would take the subway.

May be you’re not actually looking at things in a common sense way.

If a city had more than 300 million people even subways wouldn't be enough. Maybe Asimov-inspired mass treadmill walkways (imagine massive things like airports but increasing in speed as you get further from the sidewalk).

USA = 328.2 million

Shanghai = 24.28 million

(2019 numbers)

Reading WSBs, those buying Hertz right now know they are idiots, and do it anyway, knowing that they will probably lose all their money, but hoping that if they do not, they can buy a lambo.

/r/wsb are not the ones driving this but rather the millions of new accounts at zero-cost brokers, hours and hours of boredom, and possibly stimulus checks

Don’t forget about the market makers either. Robinhood and other brokerages sell data on the positions their traders are entering to their market makers (like Citadel). Then the algos front run the trade, and you end up in a situation where a stock like HTZ can rally exponentially in a day.

And RH hasn’t just lowered the bar in usability, but in trading commissions.

Who knows how many of those 150k RH users with HTZ own just $5 or $10 of it.

Nobody would’ve spent $8 in commissions to buy $10 in stock, but in RH you can.

Never saw any figures of what %age RH holders own in HTZ, which matters a lot more.

Since December basically all major banks have zero commission trading.

The only advantage RH offers now is free options trades, nobody charges for equity trades any longer.

Stock price changes should be reported on a logarithmic scale, something like a decibel, perhaps finer, a centibel, cB. You go down 90%, that’s 10x less, -100 cB. You go up 900%, that’s 10x more, +100 cB. A 5% decrease is 1.0526x less, -2.2 cB, a 5% increase is 1.05x more, +2.1 cB.

The fact that 5% is roughly 2 cB is because you need 100/2 = 50 of 5% increases (decreases) to give you roughly a 10x increase (decrease)

It's known as lognormal returns in quantitative circles.

> Hertz’s stock, which is literally worthless, starts to go up.

Clearly wasn't literally worthless, then was it.

'I didn't think it'd go up' does not mean worthless.

You'd have made some money there if you had bought at the end of May! If you don't want your 'worthless' Hertz stock then you can gift it to me.

I love it when people start explaining why, in this case, the price is wrong.

Exactly: so much for “the fair price is what the market says”.

But then: IN THIS CASE, we know better.

Let's think in first principles here, shall we? Stocks (or equity) is a fractional stake in current and future earnings of the company. We know if a company declares bankruptcy, its liabilities have exceeded assets and equity is down to zero or negative. Debt holders have higher priority stake in the company, so the first thing that happens in ~100% bankruptcy filings is debt holders take ownership of all assets. Current equity is almost always wiped out. After restructuring, debt holders may issue new equity, which may be worth something - but is completely different from what is currently circulating right now. No matter how you look at it, Hertz stock currently is worth zero. When street price of an asset is higher than its intrinsic value - that's literally the definition of a bubble. One can easily make money trading a bubble asset, but should not conflate returns here with asset's ability to generate future income.

> No matter how you look at it, Hertz stock currently is worth zero. When street price of an asset is higher than its intrinsic value

The only intrinsic monetary value of a thing is what someone else will give you for it (or what people give you for owning it, like a dividend or rent or whatever.) It doesn't matter why they'll give you that for it, only that they will.

Otherwise how do you explain the value of for example a fine art painting? What do you think their ordained true intrinsic value is? Are all paintings permanently in a bubble?

What are Hertz stocks worth? About 2.83, because that's what I can sell them for.

If you owned a hundred thousand Hertz stocks right now would you just throw the certificate away because they're worthless?

There are a lot of different definitions of intrinsic value. But it often has nothing to do with how much someone will give you.

There is the asset, an estimation of what the asset is truly valued at (intrinsic), and then finally the market price. In the case of the painting, the intrinsic value might be a function of a study of trends in demands of paintings, the artist, etc. The market price may or may not correctly factor in that information to price the painting well.

The fact that insider information does exist should paint a clear picture of why someones calculation of intrinsic value might be different from the market price.

Lastly, if someone gave me Hertz stock, I'd sell it ASAP and invest the money in something else.

https://en.wikipedia.org/wiki/Intrinsic_value_(finance)

> Otherwise how do you explain the value of for example a fine art painting? What do you think their ordained true intrinsic value is? Are all paintings permanently in a bubble?

I think the answer is yes.

Does that say more about fine art, or about the definition of a bubble?

By that logic Bitcoin should be worth zero, right?

Matt Levine: "This is also a model for Hertz, etc.: Famously, the stock of a company is a call option on the company’s assets, with a strike price of the nominal value of the company’s debt. When the company is bankrupt, the call option is out-of-the-money, cheap and highly speculative. That is, it feels more like a call option; if you are trading for fun, and call options are fun, then you will prefer option-y stocks like Hertz."

Bankruptcy does not always mean the liabilities exceed their assets. Specifically with chapter 11 bankruptcies it is usually a liquidity issue, not that they have an overall negative value.