- Hertz gives us an interesting little lesson we should all keep in mind about investing
- Politics, politicians, we might not be interested in them but they’re sure interested in our money
- Senator Elizabeth Warren – a supposed expert in bankruptcy law – attacked Hertz for doing something sensible
The Hertz Global Holdings Inc (NASDAQ: HTZWW) story is a fun one. They went bust, issued stock while in bankruptcy – those chasing stonks made that possible – and finally returned from Chapter 11 with a new capital base and so on. OK, so far so good.
The point here is not to tell that tale, that’s for another day. Instead, it’s to use one event in the story to emphasise that we cannot just ignore politics. Even when a company is doing something sensible, logical, even righteous, there’s always the possibility of one politician or another demanding power over us and our money. We can see this in a wider sense as half the Senators line up to demand power over Facebook and Amazon on this or that spurious ground – the real reason being that that’s where power is so why wouldn’t a politician be interested?
With Hertz it’s all rather more understandable in a financial sense, there’s less political accusation in it perhaps.
So, Senator Warren fires off a letter demanding to know why Hertz had paid off some shares and funded that buying in of stock by issuing bonds. It’s possible to see Warren’s letter to Hertz here. The complaint is that this reduces the capital base of the company, money which could have been used to increase the stock of cars or otherwise improve the business. And outrage, why are you doing this and so on.
The actual deal itself is described in detail here. As part of coming out of Chapter 11, Hertz had issued some preferred stock to Apollo. Coming out of Chapter 11 is risky for investors and it all becomes less risky after an IPO and then some months trading. So, capital is expensive just as you come out of Chapter 11, as it was for Hertz. For Hertz was paying Apollo 9% on that preferred stock.
Yes, preferreds are counted as equity, not debt, but which side of the line they are, really depends upon what it is that we want to talk about. That 9% coupon must be paid before anything can be paid – dividend or buyback – to the ordinaries. In terms of cashflow preferred are much more like debt than they are equity.
So, what did Hertz do here? It benefitted its shareholders that’s what. It bought in the high cost – the 9% – preferreds and replaced them with bonds at 5%. Swapping 9% money for 5% money now that risk and thus capital premiums are lower is known as good business. Even sensible, possibly righteous.
Now, if this were Bernie Sanders we could grasp the complaint, he simply doesn’t understand the subject. But Warren, her academic career was in bankruptcy law. She knows that Chapter 11 capital is expensive, she also knows that it is replaced with cheaper financing as soon as possible. She knows that Hertz was doing the right and sensible thing here. And yet still the letter.
And that is our lesson from Hertz, the one we should take from 2021 as a more general education in investing. Politicians will interfere on the basis of what is politically convenient for them to do. What is just or righteous in a business sense isn’t their point at all. This also isn’t anything exclusive to the left like Warren. We see oddities from the British right over foreigners being allowed to buy companies for example.
The purpose of using Hertz and Warren as the example here is not to make a political point. It’s that the intervention is so obviously wrong that we can make the investing point. We must always consider what politicians might decide to do to our money, our investments. For as we can see they’ll make a fuss about anything that will gain them attention, however sensible the thing they’re complaining about is.