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Three weeks ago, on a Friday, Hertz Corp. (NYSE: HTZ) declared bankruptcy. The reasons? Not hard to see: There was a radical, COVID-19-driven demand collapse for travel and car rentals, coming at a time when the company had about $24 billion in debt against around a billion bucks in cash on hand. There was a string of lackluster CEOs, as well, who pocketed millions in payouts even as they plotted to lay off more than 30,000 employees.
As a trade, if you've got a big appetite for risk, there could be some possibilities with HTZ shares, but as a "buy" proposition, this is a not a stock anyone should touch with a borrowed 10-foot pole. It's radioactive… and yet, over the past few weeks, investors, perhaps sensing a bargain of some kind, chased it from $0.56 all the way up to a high of $5.53 (hit on June 8) – more than 887%!
Now, sometimes speculators can make money moving in and out of zombie stocks, but it's very dicey, and someone has to lose out. Usually, the investors who lose are the ones who believe they've got a bargain. The New York Stock Exchange served Hertz with a delisting notice, which the company is appealing, but until something decisive happens, speculators will do what speculators do.
But these are very unusual times, and a very unusual – very dangerous – idea was being floated that would have slaughtered folks who are searching for some kind of value that HTZ simply doesn't have. It could still fundamentally alter the way American businesses enter and exit bankruptcy…
A Cynical Proposal, Even for Wall Street
What usually happens in a Chapter 11 bankruptcy is this: Creditors try to salvage what the company owes them by exchanging their debt for new stock. As a practical matter, that means taking control of a company… and wiping out existing shareholders.
And to be clear, unless by some miracle creditors get back what they're owed, those shareholders get nothing.
However, in the sign of these unusual, irrationally exuberant times, investment bank Jeffries Group figured retail investors wanted Hertz stock so much they'd be willing to buy another $500 million or $1 billion worth of it. They even agreed to underwrite the new stock offering.
Hertz ultimately backed off, under pressure from the Securities and Exchange Commission, from what would have been nothing less than a watershed event.
See, if Jefferies would have been able to sell $500 million of old Hertz stock to new buyers, the company would probably have raised enough money to help it emerge from bankruptcy without going down the usual road that's lined with broke shareholders.
Of course, since it's in bankruptcy, Hertz ran this idea past the presiding bankruptcy judge. To pretty much no one's surprise, the judge approved Hertz's request.
Like I said, ultimately the SEC put the brakes on this cynical, dangerous play. And it's a good thing, too…
It would have been open season on investors who seem at the moment to not be able to get enough HTZ.
While Hertz and Jeffries won't be the first to try, there's pretty much nothing stopping some other distressed company – take your pick – from trying again. And, times being what they are, the SEC might not be able or willing to quash it next time.
Retail investors would get stuck holding a very worthless and empty bag. And it would change the future of bankruptcy finance.
At that point, investors would be forking over good money for the privilege of being unwitting test subjects in a bizarre, risky – and (did I mention?) – cynical experiment.
Yes, it's crazy and irrational, but, with the markets being what they are and sentiment being what it is, it might work, particularly if a "buy the dip" mentality prevails.
And if it works, there's nothing to stop other distressed companies from trying to take a similar route, flooding the markets with more and more questionable, quasi-worthless stock.
Here's What to Do Now
So Hertz and Jeffries can't swing it… but the "next time" is out there, maybe just around the corner. What Hertz and Jeffries proposed would be bad for the markets, bad for regular investors, even bad for capitalism itself.
Under no circumstances should anyone buy into such a scheme.
Plus, you have the chance to make your portfolio "recession-proof" with my colleague Andrew Keene's latest system…
You see, while most investors watched their hard-earned money evaporate during the 2008 recession, Andrew collected thousands per week by developing the ultimate indicator.
He used it to identify the moves all the big players were quietly making… putting him in the know weeks before others caught on. Today, he's spilling the beans so that you, too, can turn any market condition into profits! Click here now…
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.