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April 16, 2021 – The Debtors filed a Third Modified Second Amended Joint Chapter 11 Plan of Reorganization and a related Disclosure Statement [Docket Nos. 3954 and 3963, respectively], and separately filed a redline of each showing changes to the version filed on April 15, 2021 [Docket Nos. 3955 and. 3964, respectively].
The revised documents are to be considered at an April 21st hearing to consider the adequacy of the Disclosure Statement, this hearing having previously been scheduled for April 16th.
The amended documents reflect mostly clean-up changes, but do add further detail as to exit financing.
More significantly, there is further disclosure as to a lingering dispute as to the application of an intercreditor agreement amongst first and second lien lenders; especially as the application of that agreement relates to the payment of default interest should it be determined that the (higher) default rate applies to first lien debt (the first lien lenders also argue that a substantial amount of interest is owed in respect of letteres of credit).
The Debtors argue that (i) the default rate does not apply, (ii) that the Plan does not violate the intercreditor agreement and (iii) that in any event, it is for the two lending groups to sort out amongst themselves after the Plan is confirmed.
The Debtors provide: "The Debtors also contend that the treatment of Second Lien Note Claims in the Plan does not violate the Intercreditor Agreement" but add "Second Lien Note Claims are Unimpaired under the Plan, whether or not the Intercreditor Agreement affects their ability to keep distributions received under the Plan."
Given that the Plan's two most important stakeholder groups each argue that their claims are to be considered impaired (the Plan has them as unimpaired) if they are not treated as they see fit, the Debtors may still be obligated to come up with something better than their current intercreditor arguments (clearly something of a punt).
This eventuality has now been added to a footnote: "The Debtors expressly reserve all rights with respect to Confirmation, including the appropriateness of the proposed treatment of Class 3 Claims and Class 4 Claims under the Plan and whether Claims in such Classes are Unimpaired under the Plan." Lets hope this gets cleared up prior to Plan solicitation.
Summing up the Debtors predicament: First lien lenders argue they are entitled to a higher recovery and that without it they are impaired…the Debtors argue that the first lien lenders are not entitled to that recovery, but if required to do so by the Court, they will increase first lien lender recovery as so ordered…the second lien lenders argue, however, that if amounts are taken from their recovery to pay the first lien lenders, then it is their class which impaired.
The Disclosure Statement provides: "The ad hoc group of First Lien Lenders and the First Lien Agent maintain that, in order to be considered Unimpaired under the Plan, Class 3 must be paid postpetition interest on account of First Lien Claims at the default rate and the applicable base rate as specified in the First Lien Credit Agreement and the First Lien Standalone LC Agreement, as applicable, and believe that the Plan’s proposed treatment impairs the Holders of First Lien Claims in Class 3.
To the extent that the Bankruptcy Court determines that the Debtors are obligated to pay interest at the default rate in order to render the First Lien Claims Unimpaired, the Plan provides that the Debtors will do so. The ad hoc group of First Lien Lenders and the First Lien Agent further maintain that payment at the non-default rate would also fail to fully discharge the First Lien Claims. In such a case, they believe that the Plan’s proposed treatment of Holders of Second Lien Note Claims in Class 4 would violate the Intercreditor Agreement and the rights of Holders of First Lien Claims thereunder. The ad hoc group of First Lien Lenders and the First Lien Agent also disagree with the Debtors regarding whether the interest is owed with respect to the obligation to cash collateralize letters of credit under the First Lien Loan Documents and maintain that the applicable documents provide for the accrual of interest on such obligations. The First Lien Agent asserts that the total amount of accrued and unpaid postpetition interest through April 2,2021 is not less than $57,270,729.35. The Debtors reserve all rights with respect to such assertion. The Debtors’ position set forth in the Plan is that, to the extent the Bankruptcy Court determines that the Debtors are obligated to pay interest at the default rate and/or the applicable base rate in order to render the First Lien Claims unimpaired, the Debtors will do so. The Debtors assert that they are not required to pay either default interest nor some of the other amounts claimed by the holders of First Lien Claims in order for the First Lien Claims to be Unimpaired. The Debtors also contend that the treatment of Second Lien Note Claims in the Plan does not violate the Intercreditor Agreement. The Debtors reserve all of their rights with respect to all such matters."
The Debtors' omnibus reply in support of Disclosure Statement approval [Docket No. 3924] provides a useful, up-to-the-minute summary: "Since filing their initial chapter 11 plan and disclosure statement more than a month ago, the Debtors and their professionals have continued to work to develop, build consensus around, and enhance a plan that maximizes value. As a result, the Debtors are now poised to commence solicitation (and are seeking this Court’s authority to do so) of an amended plan that is supported by the Official Committee of Unsecured Creditors (the ‘Committee’) and incorporates a fully committed proposal to invest $2.57 billion of equity capital by Centerbridge Partners, L.P., Warburg Pincus LLC, Dundon Capital Partners, LLC, and an ad hoc group of holders of more than 85% of the Debtors’ Unsecured Funded Debt (together, the ‘Plan Sponsors’). The Plan would pay senior claims in full, deliver substantial cash recoveries to the Debtors’ general unsecured creditors, and provide the Debtors’ unsecured debtholders with common equity in the Reorganized Debtors and Subscription Rights to purchase additional common equity. The Debtors would emerge from Chapter 11 with a significantly delivered balance sheet, including no corporate debt on their European businesses and $1.3 billion of corporate term loan debt, and a new ABS facility to fund the purchase of new vehicles for use in their U.S. rental car business.
The Plan and the widespread consensus support for it are products of an open marketing process in which the Debtors have dealt with all interested parties. As is evident from the change in proposed sponsorship since the initial version of the Plan was filed, the Debtors have not 'played favorites,” and instead have successfully pushed potential sponsors to deliver the best proposals possible. With all of that said, it remains critical that the Debtors continue to move their plan process forward, and expeditiously. The now “hot” equity and debt markets which have provided the billions of committed financing needed to fund the Debtors’ restructuring may turn “cold” with the passage of time. Furthermore, the Debtors must continue to build momentum to exit chapter 11 during the busy summer season and avoid a potential loss in value that could occur through an extension of these Chapter 11 Cases. Indeed, although the Debtors have successfully worked to build value using the tools of chapter 11, delays in emergence may negatively impact the Debtors’ bookings, harm the Debtors’ customer and vendor relationships, and interfere with the Company’s ability to acquire necessary fleet for 2022. The Debtors therefore remain focused on a targeted June exit from chapter 11."
The modified Disclosure Statement [Docket No. 3963] 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.
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):
- 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 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 82% 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 $4.506 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).
The Debtors will emerge from chapter 11 protection with approximately $2.3 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 a 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 82%. 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 [this combining the $448.54mn "General Unsecured Recovery Cash Pool Amount" with any recovery from the "Specified Causes of Actions"] without regard to the particular Debtor against which such Claim is Allowed; provided, that, no Holder of an Allowed General Unsecured Claim shall receive 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 $448.54mn [up from $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, deemed to reject and not entitled to vote on the Plan. Estimated existing interests are approximately 156 million shares and estimated recovery is 0%.
The modified Disclosure Statement [Docket No. 3929] attached the following exhibits:
- Exhibit A: Plan (Filed at Docket No. 3897)
- Exhibit B: List of Debtors
- Exhibit C: Debtors’ Organizational Structure
- Exhibit D: Financial Projections
- Exhibit E: Valuation Analysis
- Exhibit F: Liquidation Analysis
- Exhibit G: Plan Support Agreement
- Exhibit H: Stock Purchase Agreement
- Exhibit I: Rights Offering Procedures
- Exhibit J: Exit Term Loan Facility and Exit Revolving Facility Commitment Letter
- Exhibit K: [Reserved]
- Exhibit L: HVF III Commitment Letter
- Exhibit M: Preferred Stock Term Sheet
- Exhibit N: Price History of Existing Hertz Parent Interests and Unsecured Notes
Liquidation Analysis (See Exhibit F to Disclosure Statement [Docket No. 3929], 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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