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May 12, 2021 – Further to the conclusion of a 36-hour auction and the designation of a private equity group comprised of Certares Opportunities LLC (“Certares”), Knighthead Capital Management, LLC (“Knighthead”) and Apollo Capital Management, LP (“Apollo”) as the successful bidder and now Plan sponsors (the "Plan Sponsors"), the Debtors have moved quickly to file revised Plan documents in advance of a hearing scheduled for May 14th at which they will ask to have the auction results blessed.
Filed documents include (i) a Third Amended Plan and a related blackline [Docket Nos. 4667 and 4668, respectively], (ii) a motion to approve the new Plan Sponsor and Disclosure Statement Supplement [Docket No. 4670, which attaches the Disclosure Statement Supplement; the May 12, 2021 Modified Equity Purchase and Commitment Agreement; and Modified Rights Offering Materials) and (iii) the notice of selection of successful bidder [Docket No. 4666 which also attached the EPCA and preferred stock term sheet, the partially redacted Apollo engagement letter, and a schedule of direct equity and rights offering backstop commitments beginning on p.260].
Also filed were a pair of substantially identical declarations (filed by investment banker Moelis and Hertz Director Vincent J. Intrieri at Docket Nos. 4675 and 4672, respectively), in support of the Debtors' motion to approve the Plan Sponsors which provide some background on how the auction unfolded and the methodology for choosing a winning bid. Neither declaration provides any insight on the mindset of the losing private equity/noteholder group (ie, 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 “CWD Group”) at the conclusion of the auction.
The Debtors have yet to file an 8-K and their press release of May 12th is summarized below.
If a last minute objection were to emerge (the agenda for the May 14th hearing for the moment notes none), it would likely relate to arguments that the auction was prematurely closed and that the Plan Sponsors' winning "last and final" bid was largely the result of the attenuated shareholder recovery provided by a last minute extension of a warrant package from 10 to 30 years (to which Moelis attributes the lion's share of the winning margin, see below) and a rather fuzzy inclusion of "synergistic value from Amex GBT and other portfolio companies of the Plan Sponsors." Amex GBT is American Express Global Business Travel, a joint venture between American Express and a group of investors led by Certares.
The CWD Group may, however, be content to walk away with a $77.2mn break-up fee (plus expenses) and 100% recoveries in respect of any debt positions held (significantly noteholders holding $2.75bn had previously been projected to recover 75%).
The Moelis declaration states: "Over a continuous, approximately 32-hour period on May 10 and 11, 2021, the Debtors held an auction to select the sponsor for their plan of reorganization….The auction involved a total of three rounds of competitive bidding, with each of the prospective plan sponsor groups submitting two overbids, and then a third bid constituting its best and final offer.
The key determining factor for the Debtors’ selection of the plan sponsor was the recovery to the Debtors’ existing equity holders. In this regard, each proposal provided for recoveries to the Debtors’ existing equity holders through a combination of (i) warrants, (ii) cash distributions and (iii) a common equity distribution (in the case of the Plan Sponsors’ proposal) or a preferred equity distribution (in the case of the CWD proposal). Accordingly, we evaluated these proposals using the following methodology: (i) the value of the cash portion of each proposal was self-evident; (ii) the value of the common equity portion was determined based on the plan equity value reflected in each proposal; (iii) the value of the warrants was determined using a Black- Scholes analysis; and (iv) the value of the preferred equity was determined based on assumed market yields.
The Debtors received best and final proposals, including fully executed transaction documents, from both prospective sponsor groups at approximately 2:50pm on May 11, 2021. For purposes of its analysis, Moelis considered each of the best and final proposals to be feasible and capable of confirmation. However, using the methodology outlined above, the Moelis team determined that the total value of the recovery to equity holders under the Plan Sponsors’ proposal was approximately $1.15 billion, as compared to approximately $841 million under the CWD proposal. This equated to an estimated recovery per share of $7.36 under the Plan Sponsors’ proposal, assuming a plan equity value of $4.721 billion, as compared to $5.39 under the CWD proposal. Using the Plan Sponsors’ proposed plan equity value of $5.221 billion, which includes the Plan Sponsors’ estimated potential synergistic value from Amex GBT and other portfolio companies of the Plan Sponsors, recovery per share is $8.01. Part of the improvement in the Plan Sponsors’ proposal was an extension of their warrant package to a 30 year term from a 10 year term. When we evaluated the Plan Sponsors’ proposal assuming a 10 year term, effectively eliminating the benefit of that specific improvement, the estimated recovery per share is $5.74.
Because the CWD Group increased the dividend rate on the preferred equity distribution from 5.75% to 7.25%, for purposes of evaluation the CWD Group’s final proposal, we treated the preferred equity at par on a market yield basis. Thus, in my view, the final proposal submitted by the Plan Sponsors was the highest proposal under the circumstances at the auction."
Comparison of Best and Final Offers from Prospective Plan Sponsors (see the Moelis declaration [Docket No. 4675] for bid-by-bid detail) Plan Summary
The Disclosure Statement Supplement (attached to Docket No. 4670, p.65), provides the post-auction state of play. It should be noted that the Debtors continue to highlight the possibility that the Plan and Plan sponsor could still change and, at least until the Court issues a requested order closing the window for objecting (4pm EST on May 13th), a challenge to the auction results remains a possibility.
From the Disclosure Statement Supplement: "The Plan is premised on an implied total enterprise value of the Reorganized Debtors of approximately $6.929 billion. This amount exceeds the going concern equity value ascribed to the Reorganized Debtors in the Valuation Analysis attached as Exhibit E to the Disclosure Statement. The Debtors believe that the investment-backed value implied by the Plan following a robust marketing process and competitive auction is the best available indicator of value of the Reorganized Debtors.
The transactions set forth in the Plan result in an implied Plan Equity Value for the common stock of Hertz Global Holdings, Inc., the parent corporation of the Debtors (“Hertz Parent”), of approximately $4.721 billion. 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.
The Plan contemplates a recapitalization of the Debtors through a combination of the issuance of new debt and equity capital, and treatment of existing Claims against and Interests in the Debtors pursuant to the Plan.
Under the Plan, the Reorganized Debtors will issue new Reorganized Hertz Parent Common Interests, as follows (subject to dilution from equity reserved or granted under the Management Equity Incentive Plan and issuable upon exercise of New Warrants):
- not less than 42% will be purchased by Amarillo for $1.987 billion;
- approximately 3% will be issued Pro Rata to holders of Existing Hertz Parent Interests pursuant to the Plan;
- certain additional Reorganized Hertz Parent Common Interests will be purchased by other Equity Commitment Parties, including Apollo, for an aggregate amount of $794 million;
- certain additional Reorganized Hertz Parent Common Interests will be offered pursuant to the Rights Offering first to certain Holders of Exiting Hertz Parent Interests (i.e., those which are Eligible Existing Hertz Shareholders), and second, if not fully subscribed and funded by Eligible Existing Hertz Shareholders, to certain Holders of Class 5 – Unsecured Funded Debt Claims (i.e., those which are Eligible Unsecured Funded Debt Holders), in each case restricted to (i) “accredited investors” within the meaning of Rule 501 Regulation D under the Securities Act, or (ii) “qualified institutional buyers” within the meaning of Rule 144A of the Securities Act. The Rights Offering will be fully backstopped by certain of the Equity Commitment Parties [in respect of which they will receive a 10% backstop fee in the form of common stock]; and
- certain additional Reorganized Hertz Parent Common Interests will be distributed to certain Equity Commitment Parties that agreed to backstop the rights offering.
The Plan also provides for the issuance of $1.5 billion of Preferred Stock that will be purchased or otherwise syndicated by Apollo. The Preferred Stock is further described in the term sheet attached to the Equity Purchase Agreement as Annex A (the “Preferred Stock Term Sheet”). The Preferred Stock will accrue dividends, payable in cash or in kind as specified in the Preferred Stock Term Sheet, at a rate beginning at 9% per annum for the first two years following the Effective Date and, if not earlier redeemed, resetting semi-annually, and later annually, on the terms set forth in the Preferred Stock Term Sheet.
Like the Prior Plan, 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 the Reorganized Debtors’ working capital needs.
The transactions set forth in the Plan will raise approximately $7.216 billion in Cash proceeds, comprised of the following approximate amounts:
- $2.781 billion from the direct purchase of Reorganized Hertz Parent Common Interests by the Equity Commitment Parties;
- $1.635 billion from the purchase of stock pursuant to the Rights Offering;
- $1.500 billion from the purchase or other syndication of Preferred Stock by Apollo (subject to a 2% discount or upfront fee); and
- $1.300 billion 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 Holders of Allowed Claims:
- 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 Unsecured Funded Debt Claims against the Debtors;
- 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,3 subject to a minimum recovery of 82%.
Further, Holders of Allowed Existing Hertz Parent Interests shall receive on account of such Interests (a) Cash in an amount equal to $1.53 per share of Existing Hertz Parent Interests, and their Pro Rata share of (i) 3% of the total Reorganized Hertz Parent Common Interests, subject to dilution on account of the Management Equity Incentive Plan and New Warrants; and (ii) the New Warrants; provided that an Eligible Existing Hertz Shareholder may elect to receive its Pro Rata (based on Existing Hertz Parent Interests held by all Holders of Existing Hertz Parent Interests) share of the Shareholder Subscription Rights."
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):
Summary of class changes:
Summary of Treatment of Allowed Claims/Interests Under Prior Plan
Summary of Treatment of Allowed Claims/Interests Under Plan as Revised
5 ("Unsecured Funded Debt Claims")
Pro Rata share of 48.2% of the Reorganized Hertz Parent Common Interests plus warrants. 75% estimated recovery.
100% payment in Cash.
7 ("General Unsecured Claims")
Pro Rata Share of $550 million plus proceeds of the Specified Causes of Action. 100% estimated recovery subject to diminution for Allowed Claims above estimates with no guaranteed minimum recovery.
Pro Rata Share of $550 million plus proceeds of the Specified Causes of Action.
100% estimated recovery subject to diminution for Allowed Claims above estimates with guaranteed 82% minimum recovery.
11 (''Hertz Parent Interests")
Pro Rata share of 10-year warrants for 10% of the equity in the Reorganized Debtors.
Cash in the amount of $1.53 per share, Pro Rata Share of 3% of the Reorganized Hertz Parent Common Interests plus either 30-year warrants for 18% of the equity in the Reorganized Debtors or subscription rights to participate in a $1.635 billion rights offering for Reorganized Hertz Parent Common Interests.
Updated Summary Table
- 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 unimpaired, presumed to accept and not 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 100%. 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 payment in full in Cash of the Allowed amount of such Claim.
- 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%. Estimated claims are $547.0mn and estimated recovery is 100%. Each Holder of an Allowed General Unsecured Claim against a Debtor shall receive the greater of (i) its Pro Rata share of the General Unsecured Recovery Cash Pool Amount (plus any proceeds received on account of the Specified Causes of Action) and (ii) an amount of Cash equal to 82% of the Allowed amount of such General Unsecured Claim, 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 100% 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 (“RESERVED”) N/A
- Class 10 (“Intercompany Interests”) is unimpaired, deemed to accept/reject and not entitled to vote on the Plan.
- Class 11 (“Existing Hertz Parent”) 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 Existing Hertz Parent Interest shall receive Cash in an amount equal to $1.53 per share of Existing Hertz Parent Interests held by such Holder. In addition, (i) each Holder of an Allowed Existing Hertz Parent Interest shall receive its Pro Rata Share of (a) three (3%) percent of total Reorganized Hertz Parent Common Interests, subject to dilution on account of the Management Equity Incentive Plan and the New Warrants; and (b) the New Warrants; provided that an Eligible Existing Hertz Shareholder may elect to receive its Pro Rata (based on Existing Hertz Parent Interests held by all Holders of Existing Hertz Parent Interests) share of the Shareholder Subscription Rights instead of New Warrants by timely exercising such Subscription Rights in accordance with the Rights Offering Procedures prior to the Subscription Expiration Deadline (as defined in the Rights Offering Procedures); provided, further that any holder of Existing Hertz Parent Interests that is not an Eligible Existing Hertz Shareholder may elect prior to the Subscription Rights Expiration Deadline to have its Pro Rata (based on Existing Hertz Parent Interests held by all Holders of Existing Hertz Parent Interests) share of the Shareholder Subscription Rights sold pursuant to the Shareholder Subscription Rights Auction and receive its Pro Rata share of proceeds of the Shareholder Subscription Rights Auction instead of New Warrants.
A May 12th press release announcing the selection of the plan Sponsors stated: "Under the revised proposal, Hertz's Chapter 11 plan will be funded through direct common stock investments from the KHCA Group and certain co-investors aggregating $2.781 billion, the issuance of $1.5 billion of new preferred stock to Apollo and a fully backstopped rights offering to the Company's existing shareholders to purchase $1.635 billion of additional common stock. The revised Plan would provide for the payment in cash in full of all administrative, priority, secured and unsecured claims in the Chapter 11 cases and would deliver significant value to the Company's existing shareholders including:
- $239 million of cash
- common stock representing 3% of the shares of the reorganized Company (subject to dilution from warrants and equity issued under a new management incentive plan); and
- 30-year warrants for 18% of the common stock of the reorganized Company (subject to dilution by a new management incentive plan) with a strike price based on total equity value of $6.5 billion, or the opportunity for eligible shareholders to subscribe for shares of common stock in the $1.635 billion rights offering at Plan equity value."
The press release expounds on the competitive bidding process that ultimately resulted in the selection of the KHCA Group proposal, stating "two investor groups have been competing to fund Hertz's Chapter 11 exit. On April 21, the Bankruptcy Court overseeing Hertz's Chapter 11 cases authorized Hertz to begin soliciting votes on its Chapter 11 plan and approved a group consisting of Centerbridge Partners L.P., Warburg Pincus LLC, Dundon Capital Partners, LLC and an ad hoc group of the Company's unsecured noteholders (collectively, the 'CWD Group') as the sponsors of the Plan.
When it became apparent that the competition to sponsor the Company's Plan would continue, the Company sought and obtained Court approval of bidding procedures and an auction process to ensure that it received the highest and best sponsorship proposal within a timeframe that would permit the Company to continue working toward a planned exit from Chapter 11 by June 30, 2021. A robust competition between the CWD Group and the KHCA Group ensued, concluding with the selection of the revised KHCA Group's proposal late yesterday following the auction.
As with the CWD Group's previous proposal, the KHCA Group's proposal would eliminate approximately $5.0 billion of corporate debt (including the complete elimination of all corporate debt on Hertz's European business) and provide the Company with over $2.2 billion of global liquidity. The KHCA Group's proposal would also replace the bridge financing previously provided by the CWD Group to fund the Company's European fleet needs prior to the Plan's consummation. The debt funding commitments for Hertz's Chapter 11 plan, which were approved by the Court earlier this week, will remain in place under the KHCA Proposal."
Paul Stone, Hertz's President and Chief Executive Officer, commented in the press release, "We are very pleased that our Plan process produced such a tremendous result for our creditors and shareholders. We appreciate the strong interest in Hertz from the competing Plan sponsors and thank them for their active engagement, which provided us with excellent options for our exit from Chapter 11. We look forward to working with the KHCA Group to complete the remaining steps in our restructuring and best position Hertz for the future.
Our proposed Plan provides a robust recovery and excellent value for all of our stakeholders and enables Hertz to emerge as a much stronger, more competitive company. During our restructuring, we have made material improvements in our operational efficiency and have built added cost discipline into our business. Now, we look forward to implementing our Chapter 11 plan, which will substantially strengthen our financial structure by eliminating 79% of our corporate debt. We are well-positioned to take advantage of increasing global travel demand and new long-term growth opportunities. We are excited about Hertz's future and the benefits for all of our stakeholders – including our employees and customers as well as our investors, franchisees and business partners."
The proposed deal with the KHCA Group is reflected in definitive documents executed by the Plan sponsors, including (1) an Equity Purchase and Commitment Agreement, (2) a Plan Support Agreement, (3) a Bridge Financing Commitment for Hertz International Ltd. and (4) an Amended Chapter 11 Plan of Reorganization. The Debtors said these documents, together with an amended Disclosure Statement, were expected to be filed with the Bankruptcy Court later Wednesday.
If the Bankruptcy Court approves the revised agreements at a hearing scheduled for May 14, 2021 (at which the Debtors will also seek approval of any necessary changes to the Plan and solicitation procedures), Hertz said it "would terminate its agreements with its existing Plan sponsorship group (which remain in effect) and execute the new agreements with the KHCA Group."
A hearing to confirm the Debtors' Plan of Reorganization is scheduled for June 10, 2021.
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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