October 29, 2020 – The Court hearing the Hertz Corporation cases issued an order authorizing the Debtors to access $1.65bn of new money debtor-in-possession (“DIP”) financing to be provided by the majority holders of the aggregate outstanding amount of the Debtors’ prepetition first-lien debt (the “Commitment Parties”) [Docket No. 1661].

The go ahead on the DIP financing comes over the objection of the Debtors' Official Committee of Unsecured Creditors (the “Committee”) who had argued that the DIP financing's priming liens were impermissible given the presence of other DIP financing offers available to the Debtors. The Committe argued that: "the consensual priming DIP that the Debtors selected has serious flaws from the perspective of unsecured creditors," those flaws "impermissibly prefer[ing]" prepetition first and second lien holders in violation of requirements that priming liens are only legal when a debtor has no other options. "It is not sufficient for the Old First Lien DIP to be ‘best'," the Committee argued, "– it must also be legal."

The Debtors rebutted this argument, insisting in a declaration in support of the DIP financing that not only was the proffered DIP financing the best available, it was also the ONLY financing available. That declaration [Docket No. 1635] notes: "Although eight parties expressed initial interest in potentially providing DIP financing…no party other than the proposed DIP Lenders ultimately submitted a binding and committed proposal to provide DIP financing to the Debtors. This was the case despite the Debtors’ repeated efforts to convince other initial interested parties to drop diligence outs and remove 'non-binding' and similar qualifiers from their proposals. Therefore, the proposal submitted by the proposed DIP Lenders is not only the best offer the Debtors have received but is, in fact, the only actionable DIP financing available to the Debtors at this time.

The Debtors have continued to engage with other potential DIP lenders, including by responding to diligence requests and other discussions. Despite these efforts, the Debtors still have not received any alternative binding and committed DIP proposals to date other than the DIP Facility described in the DIP Motion and have received no indication that any will be forthcoming."

Further Background

NB: A term sheet detailing the financing is attached to the Debtors' motion [Docket No. 1523] at Exhibit B and an executed copy of an October 15th Commitment Letter entered into with the Commitment Parties is attached to the Debtors' motion at Exhibit C.

The DIP Facility would provide the Debtors with up to $1.65bn of liquidity, of which up to $1.0bn can be used for new interim fleet financing, giving the Debtors the future ability to replenish their vehicle fleet.  The DIP Facility contains economic terms that are the most favorable to the Debtors compared to other proposals received by the Debtors, including: (i) minimum draws of $250 million, (ii) interest of LIBOR plus 7.25% which is reduced to LIBOR plus 6.75% upon a significant repayment of prepetition first lien debt, and (iii) other fees as described in the DIP Term Sheet (as defined below).  The DIP Facility matures on December 31, 2021 and has limited covenants and events of default, including one milestone requiring the filing of a plan by August 1, 2021.  The DIP Facility will be secured by first priority liens on substantially all of the Debtors’ assets (subject to certain exclusions) and has the support of the requisite majority of the Debtors’ first lien prepetition debt to allow for consensual priming of existing liens.  The DIP Facility does not contain a roll-up or cross-collateralization of prepetition debt or otherwise dictate how prepetition claims will be addressed in a plan.  The closing of the DIP Facility is subject to, among other conditions, the execution of definitive documentation and approval by the Bankruptcy Court. 

In a press release heralding the development, the Debtors noted: "The financing is to be provided by certain of the Company's pre-petition first-lien lenders and is expected to be structured as a delayed draw term loan debtor facility. Up to $1 billion can be used to provide equity for vehicle acquisition in the U.S. and Canada. Up to $800 million can be used for working capital and general corporate purposes. The financing is subject to finalization of definitive documentation, Court approval and other customary conditions, and a hearing is scheduled for October 29, 2020."

The Debtors have filed cleansing materials with the SEC "which contain discussion materials related to the impact of the COVID-19 pandemic and general economic conditions on the Company’s financial condition and results of operations, including certain scenarios considered by the Company."

The Debtors' DIP financing motion provides: "The Debtors have been operating as debtors-in-possession for approximately five months using cash on hand, during which time they have made meaningful strides toward right-sizing their balance sheets, including by shrinking their national footprint, rejecting unprofitable contracts, and reducing expenditures. The Debtors have also worked with certain of their prepetition lenders to free up access to cash during these Chapter 11 Cases, negotiated a settlement in respect of their vehicle lease payments, and obtained authority to enter into a new fleet financing facility for Debtor Donlen Corporation. 

Notwithstanding such progress, the Debtors require additional liquidity to continue to operate their businesses in the ordinary course, preserve and maximize the value of their estates for the benefit of their stakeholders, and bridge to the formulation and consummation of a plan of reorganization. Having access to additional liquidity is critical for the Debtors – not only is the operation of the Debtors’ business cash-intensive, but the Debtors also must purchase hundreds of thousands of new cars in order to maintain their fleet and stay competitive.

On marketing and terms, the Debtors add: “The Debtors had sufficient cash and time to facilitate a competitive process and engage in extensive negotiations with prospective DIP lenders. The Debtors received eight proposals…In each case, the Debtors insisted that the DIP have a maturity through 2021, no roll-up of prepetition debt, no requirement to pursue any particular restructuring deal, and give the Debtors the necessary flexibility to operate their businesses, manage these Chapter 11 Cases, and pursue a plan of reorganization. 

After several rounds of negotiations, the Debtors determined that the proposed facility described in this Motion (the ‘DIP Facility’) was the most viable and provides financing on the most attractive terms. The DIP Facility provides the Debtors with up to $1.65 billion of liquidity, of which up to $1.0 billion can be used for equity toward new interim fleet financing, giving the Debtors the future ability to replenish their fleet of cars. The DIP Facility also allows the Debtors the use of up to $800 million of the $1.65 billion DIP Facility for working capital and general corporate purposes, which – in addition to cash on hand – is projected to provide the Debtors with the necessary liquidity to continue operations through 2021. 

The DIP Facility contains economic terms that are the most favorable to the Debtors compared to other proposals received by the Debtors, including: (i) minimum draws of $250 million each without any additional initial minimum draw requirement, (ii) interest of LIBOR plus 7.25% which is reduced to LIBOR plus 6.75% upon a significant repayment of prepetition first lien debt of at least [REDACTED] and (iii) other fees as described herein. The DIP Facility matures on December 31, 2021 and has limited covenants and events of default, including one milestone requiring the filing of a Chapter 11 Plan by August 1, 2021.

Key Terms of the DIP Facility

• Borrower: The Hertz Corporation
• DIP Lenders: Initially, the Commitment Parties under, and listed on Annex I to, the Commitment Letter, among such Commitment Parties and the DIP Borrower
• Guarantors: (i) Hertz Global Holdings, Inc.,(ii) Holdings; (iii) each of the Borrower’s direct and indirect Domestic Subsidiaries that are Debtors; and (iv) each of the Borrower’s direct and indirect Canadian 
• DIP Facility: A senior secured superpriority  priming delayed draw term loan facility, in an aggregate principal amount of $1.65 billion. The initial funding under the DIP Facility shall occur on the first date after the DIP Order is entered on which the “Conditions Precedent to the Initial Extension of Credit Under the DIP Facility” below have been satisfied or waived, which initial funding shall be in the amount of at least $250,000,000. The DIP Facility will be available in multiple draws at times to be determined by the Debtors in their sole discretion, on 16 days’ prior written notice to the DIP Agent (or, in the case of the initial funding of at least $250,000,000, on notice given by no later than 11:59 p.mSubsidiaries that are Debtors. (New York City time) on or before October 19, 2020; provided, that the LIBOR Rate shall not be available until three Business Days after the Initial Funding Date unless the Borrower has delivered to the DIP Agent and the DIP Lenders a customary funding indemnity letter in form and substance reasonably satisfactory to the DIP Agent and the DIP Lenders). Each draw shall be in an amount of at least $250,000,000. DIP Loans repaid cannot be reborrowed.
• Interest Rates: All obligations of the DIP Borrower under the DIP Loan Documents shall accrue interest at the rate of L + 7.25% per annum and shall be payable in cash on a monthly basis on all obligations under the DIP Loan Documents, provided, that if the aggregate purchase price for a sale [REDACTED] and the Prepetition First Lien Secured Parties shall have been paid, in accordance with the procedures set forth above in this Term Sheet [REDACTED] then the foregoing interest rate shall be L + 6.75%; provided, further, that solely in the event that a challenge to the allocation of the distribution of [REDACTED] being paid in cash to the Prepetition First Lien Obligations in accordance with the procedures set forth above in this Term Sheet, then the Loan Parties may use [REDACTED] for the interest rate reduction described in the DIP Term Sheet.
• Default Interest: During the continuance of an Event of Default, any overdue amounts under the DIP Loan Documents will bear interest at an additional 2% per annum, payable by the Borrower in cash, monthly, on the last Business Day of the month, in arrears.
• Fees: The DIP Borrower shall pay to the DIP Agent fees as agreed pursuant to any previously agreed fee letter, including a backstop commitment fee of 1.50% payable pursuant to the Commitment Letter. The Debtors have agreed to an original issue discount of 1.50%. The DIP Borrower shall pay to the DIP Agent unused commitment fees for the account of each DIP Lender, computed at a rate of 3.75% per annum, which will accrue as a percentage of the daily average undrawn portion of the DIP Facility (whether or not then available), payable monthly in arrears and on the Maturity Date.

The DIP Borrower shall pay the reasonable, documented and invoiced expenses of advisors to the DIP Agent and DIP Lenders as set forth in the DIP Term Sheet and Commitment Letter, including the Deferred Fee (as defined in the Houlihan Engagement Letter).

Prepetition Indebtedness

The following chart provides a summary of the Debtors' significant third-party financial debt obligations as of the Petition Date:

About the Debtors

According to the Debtors: "The Hertz Corporation, a subsidiary of Hertz Global Holdings, Inc., operates the Hertz, Dollar and Thrifty vehicle rental brands throughout North America, Europe, the Caribbean, Latin America, Africa, the Middle East, Asia, Australia and New Zealand. The Hertz Corporation is one of the largest worldwide vehicle rental companies, and the Hertz brand is one of the most recognized globally. Product and service initiatives such as Hertz Gold Plus Rewards, Ultimate Choice, Carfirmations, Mobile Wi-Fi and unique vehicles offered through its specialty collections set Hertz apart from the competition. Additionally, The Hertz Corporation owns the vehicle leasing and fleet management leader Donlen Corporation, operates the Firefly vehicle rental brand and Hertz 24/7 car sharing business in international markets and sells vehicles through Hertz Car Sales."

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