Hertz And Other Troubled Companies Already Needed Bailouts
The century-old Hertz filed for bankruptcy—protection from
the companies and individuals to which it owed so much—at the start of the
Memorial Day weekend.
President and CEO Paul Stone, quoted in a press release,
claimed the company had entered 2020 "with strong revenue and earnings
momentum."
They were not, according to data from S&P Capital IQ.
The last 12-month (LTM) revenue at the end of March was $9.6 billion, compared
to the $9.8 billion on December 31. LTM gross profit margin was 15.5%, down
from 17.7% in 2019. Net earnings were down 2.7% year-over-year.
And debt. Oh, how the debt flowed at 1,385.2% of equity.
Close to 14 times higher than the amount of equity shareholders and almost all
of it long-term. The significant risk for investors wasn't new.
Reality arrived last week when Hertz missed an April 29
payment and then laid off 10,000 employees. Victim of a virus? Clearly a
factor, but fiscal comorbidity was one as well. The company was too heavily
leveraged.
A recent change in leadership suggests that things were
difficult. Stone became CEO on May 18. Previous chief executive Kathryn
Marinello was thanked by the board for a "successful operational
turnaround" and wished "all the best." Presumably, she would
have been responsible for that "momentum" in her several years as
CEO.
Ah, well, women too frequently get the CEO nod when times
are bad and male candidates don't want the responsibility. When situations
improve, it’s often time to go back to the usual.
Even with improvement, the company remained in difficult
shape. The circumstances around the coronavirus and collapse of travel
highlighted the existing problems.
Hertz is not a solo traveler. Many companies joined it in
the high occupancy lane of extensive leverage. When infelicitous conditions
acted like a GPS, pinpointing their race toward potential default and even
insolvency, corporate titans and investors want help.
Hertz now occupies the driver's seat of bankruptcy, which
externalizes its woe and distributes the losses among vendors of all size. Many
companies won't need that route.
Since the middle of May, the Federal Reserve has been
snapping up corporate bonds, including those that from so-called fallen
angels—once companies with investment-grade debt to sell, brought low by credit
downgrades.
In one sense, the Fed had little choice. To allow markets to
take their inevitable path would leave major investors—including corporations,
pension funds, and others—stuck with bad debt and unable to unload it when they
needed cash. Credit markets would begin to freeze up, increasing the prospect
of a depression multiple fold.
But need doesn’t make right. Compare the treatment to the
millions who haven't been able to pay rent or other costs of living. Many of
them may soon face the street. "They should have planned better," the
voices behind wagging fingers will say. Why couldn't they simply save up six
months or so of living expenses out of low-wage jobs when they might not have
afforded healthcare?
None of them could, but they are held to higher standards
than the disciples of the market.
Modern "capitalists" and lovers of
"free" markets are like hunters who fear the veldt and woods. They
prefer commercial game preserve with a comfortable perch in a swift vehicle and
armed guides who can ensure their safety.
When things go bad, they are first in line to stress their
need for bailouts. Yes, yes, of course free markets are necessary. Just not
wise right now.
It never seems time for equal justice. Maybe next
generation, when the same things happen because national and international
mechanisms encourage risky behavior. Even seeing the numbers that foretell
impending doom, the investment class wants to squeeze out that last penny of
profit.
When rich Uncle Sam will bail you out, why not?
And if you can blame a pandemic, so much the better.
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