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April 21, 2021 – In advance of their scheduled April 21st Disclosure Statement hearing, the Debtors filed a Fourth Amended Joint Chapter 11 Plan of Reorganization and a related Disclosure Statement [Docket Nos. 4077 and 4081, respectively]; and separately filed a redline of showing changes to the versions filed on April 15, 2021 [Docket No. 4082].
After the hearing, the Debtors filed a further revised Disclosure Statement and redlined pages [Docket Nos. 4099 and 4100] with amended disclosure noting (i) a June 10, 2021 Plan confirmation hearing date, (ii) further details as to Plan's "New Warrants" and (iii) further tax disclosure as tax teams scrambled to keep up with developments in the Hertz cases.
On April 22, 2021, the Court issued an order approving (i) the adequacy of the Debtors’ Disclosure Statement, (ii) the Plan solicitation and voting procedures and (iii) a timetable culminating in a June 10, 2021 Plan confirmation hearing [Docket No. 4111]. On the same day, the Debtors filed the solicitation versions of their Fourth Amended Plan and Disclosure Statement [Docket Nos. 4129 and 4130, respectively].
Well, where to start?
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 comprised of (i) Certares Opportunities LLC and Knighthead Capital Management, LLC (the "Initial Plan Sponsors"). At the beginning of April, the Initial Plan Sponsors (at that point formally designated as Plan sponsors by the Debtors) found themselves trumped by a competing offer from a second private equity group comprised of Centerbridge, Warburg Pincus and Dundon Capital Group (the "PE Sponsors"); with the PE 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 PE 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 PE 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."
The Debtors also make clear that they may not yet be done and that the battle between plan sponsors (see further below) may yet yield another recovery-enhancing chapter. The Disclosure Statement in multiple health warnings (which feel a bit more significant than just warnings that the Plan could change without a requirement to resolicit) notes: "Notwithstanding the Debtors’ selection of the Plan Sponsors’ proposal embodied in the Plan as representing the highest and best proposal available to the Debtors as of the date of this Disclosure Statement, the Debtors may (and reserve the right to) seek Confirmation of a modified Plan that embodies a different restructuring proposal than that contemplated under the Plan attached to this Disclosure Statement as Exhibit A, which may be sponsored by the Plan Sponsors, the Initial Plan Sponsors, another sponsor or sponsor group, or no sponsor."
The Debtors have now announced three changes in sponsor-backed Plans in under two months, choosing first the Initial Plan Sponsors and then switching horses to the PE Sponsors before ultimately(?) settling on a revised offer from the latter.
The Fourth Amended Disclosure Statement [Docket No. 4099 with changes highlighted in bold] now provides, “The Plan is premised on an implied total enterprise value of approximately $5.5 billion. Taking into account $1.3 billion of new first lien debt and the sale of $385 million of new preferred stock, and adding back excess cash (assumed to be about $700 million net of minimum cash at exit), results in an implied Plan value for the common stock of Hertz Global Holdings, Inc., the parent corporation of the Debtors (‘Hertz Parent’), of approximately $4.525 billion (‘Plan Equity Value’). The new preferred stock of Hertz Parent is referred to in the Plan as the Preferred Stock and the new common stock of Hertz Parent is referred to in the Plan as the Reorganized Hertz Parent Common Interests. The warrants of Hertz Parent are referred to in the Plan as the New Warrants.
Under the Plan, (i) each Holder of the existing equity of Hertz Parent, which is currently trading over-the-counter (OTC) under the symbol HTZGQ, will receive its Pro Rata share of the New Warrants and (ii) the existing equity of Hertz Parent will be extinguished and cancelled and will entitle Holders of such Interests to no rights whatsoever other than the treatment afforded Holders of such Allowed Interests under the Plan.
The Plan contemplates a recapitalization of the Debtors through a combination of the issuance of new debt and equity capital.
Under the Plan, the Reorganized Debtors will issue new Reorganized Hertz Parent Common Interests, as follows (subject to dilution from the Preferred Stock, the issuance of additional shares resulting from increases in ALOC Facility Claims as described in the Rights Offering Procedures and equity reserved or granted under the Management Equity Incentive Plan and issuable upon exercise of New Warrants):
- approximately 48.2% to the Holders of Unsecured Funded Debt Claims, Pro Rata in exchange for such Claims;
- approximately 9.5% to be sold to Dundon for $400 million;
- approximately 2.0% to be sold to Centerbridge for $82.5 million;
- approximately 2.0% to be sold to Warburg Pincus for $82.5 million; and
- the remaining approximately 38.4% of Reorganized Hertz Parent Common Interests will be offered pursuant to the Rights Offering to all Holders of Unsecured Funded Debt Claims, Pro Rata, without regard to whether any such Holder is an ‘accredited investor’ within the meaning of Rule 501 Regulation D under the Securities Act, or (ii) a ‘qualified institutional buyer’ within the meaning of Rule 144A of the securities Act. As part of their agreement to sponsor the Plan, the members of the Ad Hoc Group of Unsecured Noteholders have agreed to exercise the subscription rights provided pursuant to the Plan to purchase Reorganized Hertz Parent Common Interests. The members of the Ad Hoc Group of Unsecured Noteholders have also agreed to purchase any Unsubscribed Shares not purchased by the other Unsecured Funded Debt Holders.
The Plan also provides for the issuance of $385 million of Preferred Stock that will be sold in equal amounts to each of Centerbridge and Warburg Pincus. The Preferred Stock is convertible to Reorganized Hertz Parent Common Interests under the circumstances and subject to the conditions described in the term sheet attached hereto as Exhibit M. The Preferred Stock will accrue dividends in the amount of 4% per annum, compounded quarterly, for the first three years (unless converted earlier), payable in the form of additional liquidation preference for the Preferred Stock.
The Plan also provides for the Reorganized Debtors to obtain a $1.3 billion senior secured term loan to fund Plan distributions and a $1.5 billion revolving credit facility to fund their working capital needs.
The transactions set forth in the Plan will raise approximately $3.873 billion in Cash proceeds:
- $565 million from the purchase of Reorganized Hertz Parent Common Interests by the Plan Sponsors;
- $1,623 million from the purchase of stock pursuant to the Rights Offering, which the Plan Sponsors have committed to ensure is fully funded pursuant to the terms of the EPCA;
- $385 million from the purchase of Preferred Stock by Centerbridge and Warburg Pincus; and
- $1,300 million in proceeds from the Exit Term Loan Facility.
The funds generated by these transactions will be used, in part, to provide the following distributions to creditors:
- Payment in full of Administrative Claims, including all amounts due in respect of the Debtors’ DIP Financing, cure costs arising from the assumption of Executory Contracts and Unexpired Leases, Section 503(b)(9) Claims, and accrued and unpaid professional fees;
- Payment in full of Claims arising from the Debtors’ prepetition first lien facilities;
- Payment in full of Claims arising under the Debtors’ prepetition second lien notes;
- Payment in full of Other Secured Claims and Claims entitled to priority under section 507(a) of the Bankruptcy Code;
- Payment in full of Claims on account of the Debtors’ guarantee of the HHN Notes; and
- Cash distributions to Holders of General Unsecured Claims in the estimated amount of 100% of the Allowed amount of such Claims.
As noted above, the Holders of Unsecured Funded Debt Claims will receive 48.2% of the Reorganized Hertz Parent Common Interests, as well as certain Subscription Rights. Based on the valuation performed by Moelis & Company LLC, which indicates the midpoint equity value of the Reorganized Debtors at $4.421 billion, Unsecured Funded Debt Holders will receive a recovery of approximately 75% on account of such Claims. The Subscription Rights permit Holders to purchase Pro Rata shares of Reorganized Hertz Parent Common Interests pursuant to the Rights Offering at a per share price based on a 6.7% discount to Plan Equity Value. The PE Sponsors’ commitment to purchase Reorganized Hertz Parent Common Interests is at the same per share price offered to Holders of Unsecured Funded Debt Claims pursuant to the Rights Offering (i.e. a 6.7% discount to Plan Equity Value).
Further, Holders of Allowed Existing Hertz Parent Interests shall receive on account of such Interests their Pro Rata share of the New Warrants, exercisable on the terms of and subject to the conditions of the term sheet attached as Exhibit A to the Plan.
The Debtors will emerge from chapter 11 protection with approximately $2.2 billion in global liquidity (inclusive of capacity under the Exit Revolving Credit Facility) and only $1.3 billion in corporate debt (exclusive of ABS facilities and letters of credit). The Debtors believe that such liquidity is sufficient to fund their operations after emergence and will provide them with the financial strength and flexibility required to successfully execute their business plan.
In addition to the transactions described above, the Plan provides for the refinancing of the Company’s U.S. ABS facilities and the continuation of the Company’s foreign ABS facilities.
Under the Plan, the Debtors will also assume their Collective Bargaining Agreements, assume The Hertz Corporation Account Balance Defined Benefit Pension Plan, and continue to administer and keep in effect the defined benefits plans sponsored by non-Debtor Affiliate Puerto Ricancars, Inc.
Finally, the transactions contemplated by the Plan include the payment in full of the notes issued by non-Debtor Affiliate HHN and an injection of Cash prior to the Effective Date to meet the liquidity needs of the Debtors’ European business. Specifically, as part of their agreement to sponsor the Plan, certain of the Plan Sponsors have agreed to provide an approximately $295 million (or approximately €250 million if denominated in euros) interim facility to fund the European businesses’ immediate cash needs. The Plan provides that such facility will be repaid upon the Effective Date. The Debtors believe that, upon emergence, their European business will be well positioned for success.
The Debtors believe that the Plan accomplishes all of the goals that they sought to achieve by commencing the Chapter 11 Cases. If consummated, the Plan will significantly reduce the Debtors’ leverage, provide the Debtors with sufficient cash to run their businesses, and provide recoveries to unsecured creditors significantly in excess of what creditors would receive in a liquidation of the Debtors if the Plan were not consummated. The Debtors urge all Holders of Claims entitled to vote on the Plan to vote to accept the Plan.”
The following is an updated summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement; see changes in bold; See also the Liquidation Analysis below):
- Class 1 (“Other Priority Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The expected recovery is 100%.
- Class 2 (“Other Secured Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $1.0mn and expected recovery is 100%.
- Class 3 (“First Lien Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $1.27bn and expected recovery is less than 100%. On the Effective Date, each Holder of an Allowed First Lien Claim shall receive payment in full, in Cash, of the unpaid portion of its liquidated Allowed First Lien Claim on the Effective Date and with respect to any unliquidated Claim with respect to undrawn letters of credit shall retain all legal and equitable rights with respect to such Claims until such letters of credit are released.
- Class 4 (“Second Lien Note Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $363.0mn (plus all accrued and unpaid interest (including interest accruing after the Petition Date) and recovery is 100%. On the Effective Date, each Holder of an allowed Second Lien Note Claim shall receive payment in full, in Cash of the Allowed amount of such Claim against Hertz Corp. and the Subsidiary Guarantors. For the avoidance of doubt, the Debtors do not believe that payment of default interest on Second Lien Note Claims is necessary to render such Claims Unimpaired.
- Class 5 (“Unsecured Funded Debt Claims”) is impaired and entitled to vote on the Plan. The estimated amount of claims is $2.75 billion (plus the amount of letters of credit drawn with respect to the ALOC Facility on the Effective Date) and estimated recovery is 75% (plus the value of the Subscription Rights) (based on a common equity valuation of approximately as of the Effective Date of $4.525 billion). Each Holder of an Allowed Unsecured Funded Debt Claim against Hertz Corp., the Subsidiary Guarantors, and, as applicable, Rental Car Intermediate Holdings, LLC, shall receive: (i) its Pro Rata share of the Unsecured Funded Debt Equity Allocation; and (ii) its Pro Rata share of the Subscription Rights.
- Class 6 (“HHN Notes Guarantee Claims,” which consists of all HHN Notes Guarantee Claims against (i) Hertz Corp.; (ii) the Subsidiary Guarantors; and (iii) Rental Car Intermediate Holdings, LLC.) is unimpaired, presumed to accept and not entitled to vote on the Plan. Estimated claims are $790.0mn (plus any accrued and outstanding interest, premiums, and fees from the Petition Date through the Effective Date, solely to the extent necessary to render the HHN Notes Guarantee Claims Unimpaired) and estimated recovery is 100%. Each Holder of an HHN Notes Guarantee Claim against Hertz Corp. and the Subsidiary Guarantors will receive payment in full in Cash of the Allowed amount of such Claim against Hertz Corp., the Subsidiary Guarantors, and Rental Car Intermediate Holdings, LLC. For the avoidance of doubt, the Debtors do not believe that payment of post-petition interest on the HHN Notes Guarantee Claims is necessary to render such Claims unimpaired.
- Class 7 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. Estimated claims are $547.0mn and estimated recovery is 100%. Each Holder of an Allowed General Unsecured Claim against a Debtor shall receive its Pro Rata share of the General Unsecured Recovery Cash Pool Amount, without regard to the particular Debtor against which such Claim is allowed.
- a recovery that exceeds eighty-two (82%) [up from 75%] percent of the Allowed amount of its General Unsecured Claim.
- “General Unsecured Recovery Cash Pool Amount” means "Cash in the amount of $550,000,000 [up from $448.54mn and before that $410.25mn] to be distributed in accordance with Article IV.J, to fund distributions to Holders of Allowed General Unsecured Claims."
- “Specified Causes of Action” means the following Causes of Action: (i)The Hertz Corporation v. Accenture LLP, Case No. 19-3508 (S.D.N.Y.); (ii) The Hertz Corporation v. Frissora et al., Case No. 2:19-cv-08927 (D.N.J.); (iii) Hertz Global Holdings, Inc. v. National Union Fire Insurance of Pittsburgh and U.S. Specialty Insurance Company, Case No. 19-06957 (S.D.N.Y.); and (iv) all Claims and Causes of Action against any Specified Prepetition KERP Participants solely with respect to amounts owed pursuant to the Prepetition KERP Program.
- Class 8 (“Prepetition Intercompany Claims”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan.
- Class 9 (“Section 510(b) Claims”) is impaired, deemed to reject and not entitled to vote on the Plan.
- Class 10 (“Intercompany Interests”) is unimpaired, deemed to accept/reject and not entitled to vote on the Plan.
- Class 11 (“Existing Hertz Parent Interest”) is impaired and entitled to vote on the Plan. Estimated existing interests are approximately 156 million shares and estimated recovery is N/A. Each Holder of an Allowed Interest shall receive its Pro Rata Share of the New Warrants.
Competing Plan Sponsors
On April 3rd the Debtors filed a Second Amended Plan and a related Disclosure Statement updating a March 30th First Amended Plan to disclose that the Debtors had apparently settled on a Plan sponsor, having in the earlier Plan noted that the choice might not be made until shortly before the then scheduled April 16th Dsclosure Statement hearing (which turned out to be the case in the end). On April 3rd, however, the choice between (i) Certares Opportunities LLC and Knighthead Capital Management, LLC (the "Initial Plan Sponsors") on the one hand and (ii) the Centerbridge/Warburg Pincus/Dundon Capital Group (the "PE Sponsors") on the other, seemed to have been definitively settled. That breakthrough following an early April decision of noteholders ($2.75bn of allowed claims sitting in Class 5 "Unsecured Funded Debt Claims") to team up with the PE Sponsors in exchange for 48.2% of emerged equity (a 75% recovery based on a $4.223bn effective date valuation for common equity).
As the update Disclosure Statement makes clear, however, the Plan was far from settled, resulting in the Debtors delaying their April 16th hearing to consider a flurry of updated proposals from each of the two private equity groups.
The Disclosure Statement provides: "Early in the morning on April 16, 2021, on the eve of the hearing to consider approval of the disclosure statement for the Third Modified Second Amended Plan, the Debtors received an unsolicited proposal from the Initial Plan Sponsors (the ‘April 15 Initial Plan Sponsor Proposal‘) that the Initial Plan Sponsors asserted was superior to the restructuring embodied in the Second Modified Second Amended Plan supported by the Plan Sponsors. Based upon this development, on April 16, 2021, the Bankruptcy Court continued the hearing to consider approval of the disclosure statement and the Stock Purchase Agreement (as defined below) until April 21, 2021 to give the Debtors and other parties in interest time to consider the implications of the April 15 Initial Plan Sponsor Proposal.
In the intervening time, the Debtors received a further revised proposal from the Initial Plan Sponsors on April 20, 2021 (the ‘Revised Initial Plan Sponsor Proposal ‘) and reviewed the April 15 Initial Plan Sponsor Proposal and the Revised Initial Plan Sponsor Proposal with their advisors. The Boards of Directors of Hertz Parent and Hertz Corp. ultimately concluded in good faith and after considering the advice of their outside counsel and independent financial advisor, that each of the April 15 Initial Plan Sponsor Proposal and the Revised Initial Plan Sponsor Proposal was a bona fide proposal or expression of interest that could reasonably be expected to result in a Superior Transaction within the meaning of such term in the Plan Support Agreement (as defined below) and the Stock Purchase Agreement, and that failure of the Boards of Directors of Hertz Parent and Hertz Corp. to pursue such alternative transaction proposals would reasonably be expected to result in a breach of such Boards’ fiduciary duties under applicable law. The Board also concluded that neither the April 15 Initial Plan Sponsor Proposal nor the Revised Initial Plan Sponsor Proposal constituted a Superior Transaction (as such term is defined in the Plan Support Agreement and the Stock Purchase Agreement). Consequently, the Debtors engaged with the Initial Plan Sponsors concerning the terms of their proposals. In addition, the Debtors further negotiated with the Plan Sponsors. Through this process, the Plan Sponsors agreed to certain enhancements to their proposal embodied in the Third Modified Second Amended Plan that was filed April 14. Those modifications, which include an increase in the General Unsecured Recovery Cash Pool Amount that will result in an estimated 100% recovery on account of Allowed General Unsecured Claims (provided that Allowed General Unsecured Claims do not exceed $550 million plus the proceeds from the Specified Causes of Action) and New Warrants to be distributed on account of Existing Hertz Parent Interests, are reflected in the Plan and are supported by the Committee.
On April 21, 2021, the Boards of Directors of Hertz Parent and Hertz Corp. concluded that the Plan Sponsors’ proposal embodied in the Plan represents the highest and best proposal available to the Debtors as of the date of this Disclosure Statement. In light of the foregoing and given the imperatives of, among other things, emerging from chapter 11 protection as expeditiously as possible, preserving the value provided by the fully committed proposal embodied in the Plan, and obtaining urgently needed liquidity for the Debtors’ European business pursuant to the HIL Facility to be provided by the Plan Sponsors, the Debtors proceeded to seek Bankruptcy Court approval of this Disclosure Statement for the purposes of soliciting votes on the Plan."
Earlier Negotiating History
[As previously reported] The Second Amended Disclosure Statement [Docket No. 3599] provides: “Specific efforts toward a plan began in November of 2020, when the Company held a series of meetings with various constituents and potential plan sponsors to start a competitive process….That process led to credible plan proposals from three different potential sponsor groups: (1) the Ad Hoc Group of Unsecured Noteholders, (2) a group led by Certares Opportunities LLC and its affiliates (‘Certares’) and Knighthead Capital Management, LLC and its affiliates (‘Knighthead,’ and, together with Certares, the ‘Initial Plan Sponsors’), and (3) a group led by Centerbridge Partners, L.P., Warburg Pincus LLC, and Dundon Capital Partners, LLC (the ‘PE Sponsors’).
The Company negotiated with each of the three potential sponsor groups. On March 1, 2021, the Debtors determined that a proposal set forth in the Initial Plan and supported by the Initial Plan Sponsors was the most favorable proposed transaction available at that time. After obtaining certain commitments from the Initial Plan Sponsors, the Debtors filed the Initial Plan that incorporated their proposal. But the Initial Plan Sponsors’ commitments with respect to the Initial Plan remained subject to certain diligence, documentation, and other conditions.
After the Debtors filed the Initial Plan, the PE Sponsors made an enhanced proposal that was competitive with the Initial Plan proposal. Consistent with their fiduciary obligations to maximize the value of the Debtors’ Estates, the Debtors analyzed the enhanced proposal and sought to secure firm commitments from the PE Sponsors. In response, the Initial Plan Sponsors indicated a willingness to enhance the Initial Plan proposal. As the Debtors continued to negotiate and consider the proposals from the competing sponsor groups, both proposals coalesced around certain common elements. To apprise parties in interest of these developments and to provide visibility into the developing plan structure, the Debtors filed the First Amended Plan and associated disclosure statement [D.I. 3501] (the ‘First Amended Disclosure Statement’), each dated March 29, 2021, which set forth the details of each proposal.
The Debtors continued to negotiate with the competing sponsor groups and to consult with certain of their constituencies. Shortly after filing the First Amended Plan and First Amended Disclosure Statement, the PE Sponsors and certain holders of Unsecured Funded Debt Claims (the ‘Initial Consenting Noteholders, and collectively with the PE Sponsors, the ‘Plan Sponsors’) agreed to make a firm commitment with respect to a proposal that improved on the PE Sponsors’ proposal described in the First Amended Disclosure Statement. On April 3, 2021, the Debtors concluded that the Plan Sponsors offered the best proposed transaction and filed the Plan.’
Liquidation Analysis (See Exhibit F to Disclosure Statement [Docket No. 4100], NB: this is first of four pages with each page beginning (as here) with consolidated group figures and then adding a debtor-by-debtor breakdown)
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