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May 3, 2021 – Two weeks after Certares Opportunities LLC and Knighthead Capital Management, LLC (together, the "Alternative Sponsor Group") woke the Debtors up with a last-minute, late-night offer that triggered a further round of bidding and that resulted in a once unthinkable recovery for the Debtors' shareholders, the Alternative Sponsor Group has shaken up the Debtors Section 363 aution process again. This time with an offer that includes a reported $2.25 per share recovery for equity (up from 60-70 cents per share, see "New Warrant Term Sheet" below).
Neither the Debtors nor the Alternative Sponsor Group have commented on the sweetened offer which is likely to be in front of the Debtors' Board today and tomorrow.
Terms of the offer, first reported by Bloomberg, include:
- Deal imputing an enterprise value of over $6.2bn
- Equity investors recovering $2.25 a share
- Hertz bondholders to be paid in full
- Knighthead will fund $2.2bn of the deal, with Apollo Global Management also committing $1.5 billion of preferred equity
In a timeline proposed by the Debtors and approved by the Court on May 28th, the Alterative Sponsor Group had until the close of play (Pacific time) on May 2nd to table an offer. That timeline now gives the Debtors' Board two days to consider whether that offer is a "Superior Transaction" vis-a-vis that of a rival private equity group comprised of Centerbridge Partners, L.P.; Warburg Pincus LLC; and Dundon Capital Partners (the "Plan Sponsors"). If it is deemed to be superior, the ball will be handed to the Plan Sponsors for three days to counter. From there: "If the Plan Sponsors indicate that they will not counter, the Debtors will 'pivot to the Alternative Qualified Proposal and the bidding process shall be concluded. If the Plan Sponsors indicate that they will counter, the Debtors will hold an auction on May 10, 2021 at 10:30 a.m. (ET) to determine, in their reasonable business judgment, the successful bidder at the auction."
As the Debtors' Board convenes, the challenge for the Alternative Sponsor Group remains considerable. Not only do they have to overcome the Debtors' clear preference for the existing Plan and Plan Sponsors (the Plan Sponsors, benefitting from the recent added support of noteholders holding approximately $2.75bn of claims), they also have to come up with a bid that includes a $77.2mn "Termination Payment" and an obligation to cover what are now the considerable expenses of all the professionals working for the Plan Sponsors and the noteholders (the "Termination Payment" and "Expense Reimbursement" are defined in the Equity Purchase and Commitment Agreement or "EPCA" filed at Docket No. 3603).
On April 22nd, the Court hearing the Debtors' cases issued an order approving the Debtors' Disclosure Statement and Plan solicitation/voting procedures. That Disclosure Statement endorses a Plan currently sponsored by the Plan Sponsors but left open the possibility that the Debtors' might switch horses (again) should a superior offer be tabled by the Alternative Sponsor Group.
Unhappy that this open-ended arrangement might drag on such that they could miss the currently "hot market," on April 26th, the Debtors filed a motion requesting an order establishing bidding and auction procedures (the "Bidding Procedures Motion") and a related motion requesting that the Court issue an order shortening the notice and objection periods in respect of the Bidding Procedures Motion [Docket Nos. 4208 and 4209, respectively]. The point of those motions was to create an expedited timetable that would draw the Debtors' sales process to a hopefully even more advantageous close.
On April 29th, the Court hearing the Hertz Corporation cases granted the motions and issued an order that effectively compelled the Alternative Sponsor Group to table a last offer [Docket No. 4310].
The order provides: "On April 21, 2021, the Boards of Directors of Hertz Parent and Hertz Corp. (together, the ‘Boards’) concluded that the Plan Sponsors’ proposal embodied in the Plan represents the highest and best proposal available to the Debtors. The Boards may consider, however any Superior Proposal in accordance with the terms of the EPCA. The Debtors will now conduct a round of bidding to (1) provide the Alternative Sponsor Group with a full and fair opportunity to present their best proposal, and (2) if necessary, subsequently provide the Plan Sponsors with an opportunity to counter such proposal at the Auction. This process is intended to obtain a plan proposal that is in the best interests of the Company and its creditors and equity holders as a whole."
The Debtors' bidding procedures motion provides: "On April 21, the Debtors sought approval of a disclosure statement in respect of their current Plan (with certain enhancements reflected therein) notwithstanding the proposal made by the Alternative Sponsor Group. As explained at the hearing, the Debtors did so because the Debtors had a fully committed and superior proposal from the Plan Sponsors, timing was of the essence and the Debtors simply could not wait for the Alternative Sponsor Group to further develop its proposal. Indeed, it is absolutely critical for the Debtors to proceed to confirmation on the Court-approved timeline for a number of reasons. Among other things, the Debtors’ European business needed an immediate infusion of capital that the Plan Sponsors had fully documented and were prepared to provide immediately upon the approval of the disclosure statement in respect of the Plan.
The Alternative Sponsor Group could not deliver such financing in the time required by the Debtors. Further, the Debtors believe it is essential to capitalize on the “hot” equity markets, that could turn “cold” if the Debtors do not quickly proceed to confirmation. Finally, the Debtors strongly believe that they must emerge from chapter 11 during the busy summer season or they will be at a significant competitive disadvantage. Indeed, delays in emergence could negatively impact the Debtors’ bookings, harm the Debtors’ customer and vendor relationships, and interfere with the Company’s ability to acquire necessary fleet vehicles for 2022. Accordingly the Debtors believe it is imperative that they emerge from chapter 11 by the end of June."
Evolution of the Plan Sponsors' Plan
In the early morning hours of April 16th, just hours before a planned Disclosure Statement hearing was scheduled to begin, the Debtors were awoken by an unsolicited offer from a one-time favored Plan sponsor, ie the Alternative Sponsor Group. At the beginning of April, the Alternative Sponsor Group (at that point formally designated as Plan sponsors by the Debtors) found themselves trumped by a competing offer from the Plan Sponsors; with the Plan Sponsors teaming up with noteholders who agreed to exchange their debt for 48.2% of the Debtors' emerged equity. The combined heft and deal certainty of the Plan proposed by the Plan Sponsors and noteholders (the noteholders had initially composed a third discreet potential sponsor group) ultimately winning the support of the Debtors' board.
The surprise April 16th call, triggered a series of new proposals and counterproposals, with the Debtors' board postponing the Disclosure Statement hearing to consider the realtive merits of the enhanced offers. Ultimately, the Debtors decided to stick with the Plan Sponsors for largely the reasons espoused when they were first chosen, ie the supportive weight of noteholders holding approximately $2.75bn of claims. The Plan terms, however, have significantly improved for two significant stakeholder groups.
This latest turn (or rather two turns) of the Plan documents are nothing if not generous in their plot twists in what is bankruptcy's current blockbuster case. Clearly the most eye-catching headline is the decision to issue warrants to equity holders. This comes after months of speculation (both thoughts and equity) as to whether resurgent expectations for the car rental sector would push the Debtors and competing plan sponsors to provide a recovery that would crest the dam and cascade down into an equity class which the Debtors have insisted would be left empty-handed.
That dam has now not only broken but also added over $100.0mn to the recovery of general unsecured creditors as the waterfall made that more senior class (nominally) whole before leaving equity with six-year warrants representing 4% of the "Reorganized Hertz Parent Common Interests" based on a total equity value of approximately $6.1bn.
As discussed further below, "[T]he Debtors have estimated the value of the New Warrants using a Black-Scholes valuation and a volatility range of 50-65%. Based on that analysis, the value of the New Warrants is estimated at $83 million to $107 million, with a midpoint of $95 million."
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