Neil Collins’ Notebook – Ouch! That Hertz!
Car rental is a pretty cut-throat business. Anyone with a car can play, but ask for a brand name, and the answer is likely to be either Avis or Hertz, with their global reach and the belief that they will still be in business when you bring the car back. Perhaps that is why last May, when Hertz filed for Chapter II bankruptcy, lots of small investors bought the shares for little more than $2 apiece.
They know nothing about investing, scoffed the experts. They are wasting their money, just because they had heard of the company. Then a funny thing happened. The Hertz failure, it soon became apparent, was like one of those claims following a car crash that wasn’t your fault. When the pandemic panic struck in March last year, the value of second-hand cars plummeted. The financially-stretched company had borrowed more to buy them, using their value as collateral. As that fell, the creditors demanded more collateral, which Hertz did not have. There was no choice but bankruptcy.
But almost immediately, car values started to recover along with the share price of this supposedly worthless company. Hertz discovered that it had unissued shares in its treasury, and asked the court whether they could issue them to the market. In a 4000 word judgement, while describing the shares as “worthless” the permission was granted. The prospectus for the sale said: “we expect that common stock holders would not receive a recovery through any plan”. The Financial Times decided: “The proposition is a fantastical one.” On the prospects of a return for the buyers, “impossibility is the word that springs to mind.”
Then the Securities & Exchange Commission stepped in and spoiled the fun. You can’t do this! You’re bust! Bankrupt companies can’t issue shares! SEC chairman Jay Clayton did not put it quite like that, instead telling CNBC that “We have let the company know that we have comments on their disclosure…in most [of these] cases they do not go forward until those comments are resolved.” The share issue was stopped.
It’s pleasing the way markets have of making fools of the experts, and as the financial crisis at Hertz passed, suddenly the business looked worth buying, and private equity wasps were round the jam jar. The winners of the auction value the business at $7.43bn, the shareholders get cash and warrants potentially worth $8 a share, and the price has rebounded to a very satisfactory $6.80. America being the land of lawyers and litigants, the next chapter after Chapter II is likely to be legal action against the board, for blundering into such a calamity in the first place.
Matt Levine, Bloomberg’s brilliant commentator, ate humble pie this week, although his original verdict was less dismissive than the FT’s. From the Pink’Un itself, now the impossible has happened, well, No FT, No Comment.
Just a Bit of a sell-off
One of the whackier free-market ideas espoused by the great F A Hayek was to tackle the idea that states should have a monopoly on issuing money. This offended his central belief that everything works better under the lash of competition, which drives innovation, keeps business (reasonably) honest and benefits the many rather than the few.
He was chided for this extension of his philosophy but now, in a funny sort of way, it seems to be coming to pass with the invention of the crypto coin. There are now said to be 9856 different versions of these things, with bitcoin being dominant (he wouldn’t like that either) as promoters have seen the chance to make what they themselves will doubtless still think of as a quick buck.
The earlier promoters of Bitcoin argued that it was both a store of value, freed from the government printing press, and a medium of exchange, two key features of a credible currency. It has not quite worked out like that. As both, Bitcoin’s value has swung violently. Even in the brief window when Elon Musk said he would take payments for Tesla cars in the coins, it was obvious that the price would be the number of coins that corresponded to the dollar price of the car, whatever that number was at the point of sale.
Now that a small cloud, no bigger than a man’s hand, marked inflation appears on the horizon, our confidence in paper money will be tested again, and monopoly governments will resort to the printing press if it seems the least painful option. It’s not hard to see why. Even inflation-wracked currencies are the most convenient medium of exchange, in ways that Bitcoin can never be, however mainstream it becomes. After all, we have had an alternative to fiat money for longer than fiat money has existed. It’s called gold.
She’s getting on with it, at least
The new broom at Aviva was busy doing more good work this week. Amanda Blanc is cleaning house “at pace” as she promised when she took over at the perennially underperforming insurance conglomerate. The latest move is to wind down its £366m UK Property Fund, which closed to redemptions as the pandemic struck, and has never reopened.
The virus trapped about £11bn in these property funds. Some have since re-opened, but many investors got a nasty surprise at the bid price. The Aviva fundholders will have to be patient. They should see 40 per cent of the current value of their investment back in July, but may have to wait for two years for the rest.
Meanwhile, the Financial Conduct Authority has launched a review of these wretched vehicles, which promise instant money back while investing in property, which as any fule kno, is a sticky business at the best of times, and can be unsaleable in a crisis. It would be tricky to ban their sale outright, as common sense suggests, but other solutions smack of square pegs in round holes.
Forcing sellers to wait locks them in to an out-of-date price, while keeping a slug of cash to cover redemptions will inevitably affect performance. Investment trusts are far more suitable for smaller investors determined to get into commercial property. Open-ended funds can close without warning, while the closed-ended trusts are always open – although you may not much like the price you are offered.