Fri 07/24/2020 17:59 PM
/ Order (Revised Proposed)
The Hertz debtors today received approval of the agreed order
providing for an interim resolution through the end of the year of the various issues arising from the master lease for the U.S. rental fleet. “I do like to see peace break out,” Judge Mary Walrath said when approving the order, riffing on an earlier comment from debtors’ counsel, Tom Lauria of White & Case, that the debtors, nondebtor master lessor Hertz Vehicle Financing, or HVF, and the ABS lenders had reached “interim peace” while preserving litigation rights for 2021 if further consensual agreements cannot be reached. Counsel to the MTN steering committee, Michael Benn of Wachtell, and the VFN agent, Marshall Huebner of Davis Polk, both made statements in support of the interim agreement.
Amy Caton of Kramer Levin, appearing for the official committee of unsecured creditors, said that it “was not an easy decision” for the UCC to refrain from objecting to the proposed agreement
. Specifically, Caton criticized the debtors’ agreement to pay $650 million in cash for master lease base rent payments through year-end because that amount would be a “substantial strain” on the debtors’ liquidity. While the UCC focused on the $650 million amount relative to the debtors’ current liquidity, Lauria noted the negotiated base rent is about half of what the debtors would be contractually obligated to pay, a point reiterated later in the hearing by Huebner, for the VFN agent, who characterized the overall agreement as “very deeply concessionary” for ABS lenders who are, for the interim period, foregoing more than $1 billion of claims that would otherwise accrue under the master lease.
On liquidity, Lauria said the debtors have approximately $1.1 billion in U.S. cash and are operating on a “relatively cash neutral basis,” which the debtors anticipate will continue. He clarified that these comments were limited to operating cash flows and did not take into account the debtors’ obligations under the master lease pursuant to the interim agreement.
The court entered the order shortly after the hearing. During the hearing, Huebner had requested the court enter the order as soon as possible, because Monday, July 27, is a monthly payment date under the master lease.
The hearing commenced with an overview from Lauria of the interim agreement, during which he provided additional context for the deal that was not explicitly included in the order. Running through the benefits of the agreement, he noted that it allows the debtors to avoid the expense and distraction of “high-stakes” litigation until at least January 2021, provides certainty with regard to the debtors’ cash flow requirements under the master lease through the end of the year and gives management additional time to observe the coronavirus pandemic’s ongoing impacts to demand for car rental services. Lauria said the additional certainty regarding the debtors’ interim cash needs would better facilitate the pursuit of DIP financing (he noted later in the hearing that all parties’ rights are reserved regarding any future DIP financing).
Huebner, for the VFN agent, later expounded on the litigation which has been avoided - at least through year-end - as a result of the agreement. He said “multi-hundred million dollar litigations” avoided in the interim include severability of individual vehicle leases from the master lease; ABS lenders’ entitlement to adequate protection under section 363(e) on account of vehicle depreciation; ABS lenders’ entitlement to administrative claims during the first 60 days of the cases; and the precise timing of “timely” payments of section 365(d)(5) administrative claims 61-plus days into the cases. “Hopefully none of this ever has to be addressed” through litigation, Huebner continued. Regarding potential future litigation, Caton said the UCC has reserved its right to assert that the master lease should be recharacterized as a disguised financing.
Lauria attributed the settlement to extensive good-faith negotiations and “a little good luck” that the used-car market has rebounded.
While vehicle rental demand has not recovered to pre-coronavirus levels, Lauria said that used-car sales “began to spike” shortly after the petition date, presenting an opportunity for Hertz to capitalize on the used-car market and sell more vehicles, at higher prices, than anticipated. Huebner later said Lauria had been “too modest” and credited the debtors for “mov[ing] with great speed” to take advantage of the rebound in used-vehicle prices. Huebner noted postpetition sales had included “a large bulk sale,”
a potential reference to the debtors’ approximately $1 billion sale
of vehicles to Enterprise previously reported by Reorg.
Lauria said the debtors have increased their equity cushion in the U.S. fleet relative to the outstanding ABS debt. He did not quantify this impact but said the debtors’ equity in the fleet “may become an important component” of the debtors’ reorganization
. He cautioned that “there are limits” to vehicle sales as a source of revenue and that the debtors ultimately need to have an understanding of the timing and shape of demand recovery of the travel industry and a return to making money by renting cars.
Regarding the debtors’ payment of $650 million of master lease “base rent” in six equal monthly installments of $108.3 million under the interim agreement, Lauria told the court this amount is “substantially less” than the contract rate. He estimated the debtors would have paid about $1.3 billion in base rent but for the interim agreement, resulting in a roughly 50% discount for six months. Lauria noted the interim nature of the agreement and told the court the ABS lenders have reserved the right to argue that the full contract rate should have been paid in full and for administrative priority claims, while the debtors retain the right to argue they should pay less under Bankruptcy Code section 365(d)(5)’s “equities of the case” provision.
Later, Huebner said that the agreement had been “a hard sell” for the ABS lenders, and he estimated that in the absence of the interim agreement and after netbacks due to Hertz for servicing and other obligations under the master lease, there would be approximately $1.8 billion of claims under the master lease from the petition date through year-end. He noted the $650 million stipulated payment of base rent, which is one of three primary components of monthly master lease charges, is significantly less than the amount called for by the master lease. The ABS lenders’ “billion dollar liquidity settlement” is in addition to payments not made under the master lease prepetition, Huebner said, presumably a reference to the April 27 master lease payment which the debtors did not pay in full, which triggered various events of default and the debtors’ ultimate May 22 chapter 11 filing. He cast the interim agreement and lenders’ forbearance from enforcing their rights to full payment under the master lease as a “very ample contribution” to the debtors’ liquidity through year-end.
Lauria also walked the court through “a number of other lesser but important” points regarding the interim agreement, including the following:
- The debtors receive cash savings from:
- Payment of “variable rent” interest and fees due under the master lease via letter of credit draws, which relieves Hertz of approximately $25 million of ongoing monthly cash obligations. “We’re in effect converting that claim into a prepetition unsecured claim” because the letters of credit are unsecured, Lauria commented.
- Accrual of superpriority administrative claims plus one-month LIBOR + 550 interest, rather than cash payment, on casualty vehicle claims. Pari passu treatment with any DIP priming lien would be accomplished via a carve-out, and the current order does not itself grant any lien, Lauria noted.
- The debtors are “over 100%” ahead of target cumulative vehicle disposition proceeds, Lauria said, and believe there is a “minimal risk” that they would be called upon to make true-up payments required by the interim agreement if cumulative proceeds fall more than 5% below target. The debtors this morning filed cleansing materials with estimated monthly vehicle disposition figures.
- The increased contractual depreciation rate of 2% per month “would become relevant” for calculating contractual rent claims for the interim or future periods if the parties ultimately are required to litigate the amount of contractual rent claims, Lauria explained.
- The debtors’ option to retain 40,000 vehicles that would otherwise be disposed of is designed to give the debtors the option “in an upside scenario” where there is a turnaround in the rental business to increase the otherwise stipulated maximum 310,000 vehicle fleet up to 350,000 vehicles.
- Professionals’ fees are capped at $10 million through year-end for MTN and VFN advisors.
After his overview of the interim agreement, Lauria explained the “handful” of changes in the latest form of revised order filed this morning (linked above). He said the order provided additional clarity that the casualty superpriority administrative claims would be subject to a carve-out in any future DIP financing, granted the secured corporate debt parties the same information rights as the ABS parties and slightly revised various professional fee provisions.