Hertz expects to bring down leverage, may consider refinancing bonds

By Paul Deckelman

New York, Aug. 11 – Hertz Global Holdings, Inc. ended the 2015 second quarter with its net corporate debt at 4.9 times its last-12-month adjusted corporate EBITDA, well up from a 3.6 times leverage ratio in the year-ago period.

But the Naples, Fla.-based car-rental and equipment-rental giant expects to bring its leverage ratio down below the 4.4 times at which it ended 2014.

On their conference call Tuesday following the release of financial results for the period ended June 30, company executives did not elaborate on Hertz’s plans for reducing that leverage measure.

However, its senior vice president and chief financial officer, Thomas C. Kennedy, indicated that the back half of the year will see Hertz as a busy presence in the U.S. and international capital markets.

Hertz has a complicated capital structure divided into corporate debt issued at the parent company level and fleet debt borrowed by subsidiary entities. Corporate debt includes the parent’s senior term loan and senior asset-based revolving credit facility and the senior and senior subordinated notes issued by its principal operating subsidiary, Hertz Corp., and by the latter’s Hertz Holdings Netherlands BV subsidiary. Fleet debt includes various medium-term notes issued by special-purpose vehicles, its European revolving credit facility and various securitization facilities.

Kennedy said the company anticipates executing one or more term ABS transactions in the United States, refinancing its Canadian and Australian securitization platforms and issuing additional European fleet notes.

He additionally said that “we also may consider refinancing some of our callable bonds,” although that would depend on market conditions and the timing of the completion of a pro forma financial statement that would reflect the company’s previously announced transaction spinning its Hertz Equipment Rental Corp. unit off from the rest of the company.

Problems delay spin-off

Hertz announced plans for that spin-off in March 2014. The transaction would see Hertz Equipment Rental making a $2.5 billion net cash distribution upon separation to former corporate parent Hertz, which would use the money to pay down debt and, subject to market conditions, to also support a planned $1 billion share repurchase program that could see Hertz buy back up to 20% of its outstanding shares.

Hertz’s spin-off plans anticipate that the new equipment company would have a net leverage ratio of 3.5 to 4 times pro forma adjusted EBITDA upon the separation of the two entities, while legacy Hertz – now minus the equipment unit and the debt associated with it – expects to maintain a target net corporate leverage ratio in a range of 2.5 to 3.5 times.

Hertz originally envisioned the separation transaction closing early this year, but that timetable was thrown way off schedule last year by accounting problems that prevented Hertz from making timely filings of its financial data with the Securities and Exchange Commission.

Compounding the uncertainty was an internal boardroom battle, pitting activist investor Carl C. Icahn against management. As the accounting problems unfolded and other operational problems surfaced, Icahn disclosed in the spring of 2014 that he had taken an 8.48% stake in the company, making him its single largest shareholder. He said that Hertz was “undervalued” and that he lacked confidence in management.

By the late summer of 2014, Hertz and Icahn had reached an agreement allowing the billionaire to replace three of the independent directors on the company’s board with three of his own nominees in exchange for agreeing to drop plans for a proxy fight. Two of Icahn’s men immediately became part of the five-person search committee looking for a replacement for chairman and chief executive officer Mark Frissora, who had stepped down just days before, citing personal reasons. Frissora was first replaced on an interim basis by Hertz Equipment Rental president and CEO Brian MacDonald and eventually on a permanent basis by former airline and logistics executive John Tague, Hertz’s current president and CEO.

The company meanwhile continued to untangle its accounting problems, which had caused it to warn that previous results dating as far back as 2011 could not be relied upon. Last month, it finally filed a 10-K annual report for 2014, with separate quarterly information for the 2014 quarters in which it had not filed quarterly data because of the accounting problems. The filing also contained audited restated financial statements for 2012 and 2013 as well as selected restated financial information for 2011. At that time, it also filed a belated 10-Q quarterly report for this year’s first quarter, and it filed its second-quarter 10-Q as scheduled on Monday.

Still committed to spin-off

With the restatement of the results for the past several years now completed, Hertz said that it remains committed to the eventual separation of its equipment rental business and is now focused on completing the audited carve-out financial statements for Hertz Equipment Rental and the requisite SEC filing activities for the separation.

It reiterated its earlier projections that the net cash that the parent company will receive in connection with the Hertz Equipment Rental separation will be used to pay down debt and support additional share repurchases and reaffirmed its previous guidance about the expected post-separation leverage levels for the parent company and the newly emancipated Hertz Equipment Rental.

As of June 30, Hertz’s total consolidated debt, not adjusted for any cash balances, stood at $17.68 billion, up sequentially from $16.35 billion at the end of the first quarter on March 31 and from $15.99 billion at the end of the 2014 fiscal year on Dec. 31 of that year. Net corporate debt at June 30 stood at $6.04 billion, while net fleet debt came to $10.69 billion. The balance sheet showed unrestricted cash and equivalents at June 30 of $537 million, along with $421 million of restricted cash.

The company’s corporate capital structure included $2.07 billion of floating rate senior term loan debt due 2018, currently incurring interest at 3.68%, and $547 million of floating-rate senior ABL facility debt coming due between March 2016 and March 2017 and incurring interest at 2.42%.

There was also $3.9 billion of outstanding senior junk bond debt: $250 million of 4¼% notes due April 2018, its nearest bond maturity, as well as $700 million of 7¾% notes due October 2018, $1.25 billion of 6¾% notes due 2019 – the single largest piece of bond debt – plus $700 million of 5 7/8% notes due 2020, $500 million of 7 3/8% notes due 2021 and $500 million of 6¼% notes due 2022.

Hertz’s consolidated GAAP interest expense for the quarter decreased by $8 million, or 5% from a year earlier, to $156 million from $164 million a year ago.

Kennedy said that adjusted interest expense, net of interest income, declined by $11 million versus the prior year, “primarily due to favorable foreign currency translation and lower U.S. fleet debt rates, which more than offset higher U.S. fleet debt levels. We expect this favorability will reverse as we execute capital market transactions to term out a significant portion of our U.S. ABS fleet debt.”

Liquidity at the quarter’s end stood at $1.56 billion, consisting of the $537 million of unrestricted cash on the company’s books plus $1.03 billion of availability under its ABL facilities.

© 2015 Prospect News.
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