Relevant Document:Agenda
Hertz obtained all requested first day relief, including interim
access to cash collateral to fund the Donlen fleet leasing operations, at today’s first day hearing before Judge Mary Walrath. The timing of the debtors’
chapter 11 filing last Friday night was driven by the expiration of short-term forbearance and waiver agreements necessitated by the debtors’ failure to make a required monthly rent payment under their master vehicle operating lease in late April.
The court scheduled a second day hearing for June 25 at 3 p.m. ET, with an objection deadline of June 18 at 4 p.m. ET.
Reorg’s live coverage of today’s hearing can be found
HERE.
Debtors’ Plans for the Cases
Tom Lauria of White & Case, counsel to the debtors, walked the court through Hertz’s business and certain objectives and considerations in the chapter 11 cases. In addition to the company’s core car rental business, Lauria detailed the Donlen fleet management and leasing business and the “massive” vehicle disposition business, which Hertz uses to sell vehicles through three channels: Hertz retail outlets, used car auctions and direct-to-dealer outlets.
Lauria said that the company has about 730,000 vehicles across all of its operations and approximately 500,000 in its U.S. fleet, after dispositions throughout the year. In the
quarter ended March 31, Hertz’s total fleet consisted of 867,900 vehicles on average, comprising 518,600 in its U.S. fleet, 148,000 in its international fleet and 201,400 in its Donlen fleet.
Lauria added that the company canceled every new vehicle order for 2020 and returned “as many vehicles as possible.” “We are studying the appropriate way” to reduce the 730,000-vehicle fleet further, he continued. Briefly addressing
statements filed by certain ABS stakeholders ahead of the hearing that the debtors have not taken appropriate action to reduce the fleet, Lauria said that one of the first priorities was to cancel new orders and return vehicles. Had the company been unable to return the vehicles that it did, Hertz would have had roughly 150,000 more vehicles in its fleet than it does now, which would have increased the ABS obligations more than they are, he continued.
Turning to the master vehicle operating lease, which is the mechanism through which debtor operating subsidiaries obtain use of the rental car fleet owned and financed through certain nondebtor entities’ vehicle-backed securitization programs, Lauria noted that base rent amounts to “about $300 million” per month. In addition, Hertz’s operating subsidiaries are subject to financing charges and depreciation true-ups based on resale values in the used car market, which has significantly weakened. The mark-to-market component totaled $135 million in April alone, according to Lauria, adding that the amount is anticipated to increase.
A comment was made toward the end of the hearing that
the average car in Hertz’s vehicle fleet depreciates by $16 dollars per day and would represent the largest source of diminution in value in these cases. This would mean approximately $5,840 annually per vehicle, on average, and approximately $2.92 billion on an annual basis if applied to the approximately 500,000 vehicles in Hertz’s US fleet.
Lauria
announced during his remarks that “15 minutes before the hearing,” the euro vehicle notes waivers were achieved and effective. The required majority of the euro notes due 2021 have now approved the
waivers sought through Sept. 30 and the acceleration of the euro notes has been rescinded, as
reported by Reorg.
Outstanding Issues
Although all first day relief was granted, various parties raised concerns with forthcoming issues in the cases. Most of these issues arise from complications in the debtors’ corporate and capital structures, including cash management and cash collateral concerns.
At several points, the debtors and other parties questioned whether certain constituencies, for example, ABS noteholders with claims against nondebtor entities that in turn have claims against debtor entities, had standing to make certain arguments.
Gregg Galardi of Ropes and Gray, counsel to the Canadian securitization noteholders, noted for the record that his clients may use nondebtor property not subject to the Bankruptcy Code’s protections to pay down debt under the Canadian ABS facility.
Master Operating Lease
Perhaps the largest single issue in the case is the debtors’ treatment of the master vehicle operating lease. As noted at today’s hearing and in the debtors’ first day papers, the company’s U.S. car rental business is dependent upon the use of approximately 500,000 vehicles acquired with proceeds from the “HVF II” ABS program and owned by a nondebtor special purpose entity. Approximately $10.9 billion of debt, consisting of $4.855 billion of revolving variable funding notes, or VFNs, and $6.038 billion of medium-term notes, or MTNs, under the HVF II ABS program is outstanding. The HVF II VFNs are issued via one tranche, HVF II Series 2013-A, while the HVF II MTNs are issued across 11 tranches.
A detailed capital structure, breaking down various series of corporate debt and ABS, can be seen
HERE.
The Donlen ABS program, which is issued out of Hertz Fleet Lease Funding LP, or HFLF, represents approximately $1.592 billion of debt, comprising $485 million in one series of VFNs and $1.107 billion across three series of HFLF MTNs.
Deutsche Bank, New York Branch, in its capacity as the administrative agent for the HVF II VFNs, was represented by Marshall Huebner of Davis Polk at today’s hearing. The HVF II MTN steering committee was represented by Richard Mason from Wachtell. Mason noted that the MTN steering committee is coordinating with the VFNs represented by Davis Polk.
Lauria said the “difficult” decision to not pay the full April 27 operation lease amount was made based on the fact that monthly operating cash burn of over $100 million plus a lease payment of approximately $400 million would have substantially “exhausted” the debtors’ liquidity.
Looking ahead, Lauria said objectives for the next 60 days of the case “foremost” include right-sizing the fleet. He observed that Bankruptcy Code section 365(d)(5) provides a 60-day “breathing spell” before the debtors must make “timely” payments on leases of personal property such as the operating lease.
Lauria said Hertz is “likely” to seek relief from the court under the “equities of the case doctrine” in order to avoid making the full amount of payments that would otherwise be due and would seek to reach consensus with ABS holders on “realistic liquidity requirements.” The “equities of the case” comment was a reference to the exception from Bankruptcy Code section 365(d)(5)’s general rule that a debtor “shall timely perform all of the obligations” under an unexpired lease of personal property until such lease is assumed or rejected, “unless the court, after notice and a hearing and based on the equities of the case, orders otherwise with respect to the obligations or timely performance thereof.”
Mason of Wachtell made an appearance at the conclusion of the hearing to say the steering committee of MTNs “share[s the VFNs’] concern” that the debtors are “effectively” leasing the vehicles subject to the ABS programs “without paying for them.” He referenced Lauria’s statement regarding the equities of the case provision of section 365(d)(5) and said the MTNs’ position is “we don’t think using the vehicles without paying for” that use is particularly equitable. He says the MTNs are prepared to litigate that point if it “unfortunately” becomes necessary.
Cash Collateral
The debtors’ cash collateral motion was approved on an interim basis over some informal concerns. Judge Walrath cited the presence of “exigent circumstances,” the fact that the motion was presented on a consensual rather than contested basis and that the adequate protection granted is subject to challenge and retroactive revision. David Turetsky of White & Case told the court that filing of the motion was delayed in order to reach an agreed form of order.
Turetsky noted that although agreement has not been reached beyond the interim period, the prepetition secured parties and “sidecar” financing facility have agreed with the debtors to permit the use of certain unencumbered cash collateral and the Donlen cash collateral to continue ordinary course operations for the time being, with disputes regarding the extent of unencumbered cash to be resolved consensually or at a later final hearing. Suzzanne Uhland of Latham & Watkins, counsel to Barclays in its capacity as administrative agent for the first lien lenders and a letter of credit facility, said that although the first lien lenders hope to address their concerns with the debtors consensually, there is a “substantial dispute” regarding the nature of the lenders’ liens and the lenders believe “a majority of” the debtors’ cash on hand is in fact encumbered by first liens, contrary to the debtors’ representations in their first day papers that substantially all of their cash on hand is
unencumbered.
Cash Management
The debtors’ cash management motion, which counsel said was “simply seeking to maintain” “ordinary course” cash management, prompted some discussion of concerns with flows between debtor and nondebtor accounts. The debtors’ presentation focused on changes to the language of the proposed order to alleviate various idiosyncratic concerns. Changes discussed included, among others, that consistent with prepetition practice, proceeds from the sale of vehicles that are collateral for the US HVF II ABS program “shall” be remitted to the appropriate nondebtor account. Also, for avoidance of doubt, accounts at nondebtor affiliates “are not ‘bank accounts’ subject to this order.”
Aaron Colodny of White & Case walked the court through the various elements of relief sought. He noted that as a result of discussions with various parties including the UST, the debtors have agreed to cap intercompany transfers to nondebtors during the interim period of these cases at $70 million. Colodny noted that $60 million of this amount would be attributable to funds received by two debtor entities that “act as a pass-through” for payment of off-balance sheet debt. Another $8 million to $10 million would be related to shared services payments.