Hertz suspended its plan to sell $500 million in common stock on Wednesday after the Securities and Exchange Commission questioned why the rental car company would sell shares that “could ultimately be worthless” to finance its operations during bankruptcy.
Hertz shares rebounded after it suspended the secondary-market stock sale, Barrons reported.
Based in Estero, Florida, Hertz filed for bankruptcy protection on May 22 after the bottom fell out of the travel industry due to the coronavirus pandemic. With about $1 billion in cash to support its operations, Hertz has $17 billion in debt with 500,000 cars that are financed through leases, NBC reported.
Shares of the company fell to about 55 cents following the bankruptcy announcement. Smaller retail investors started buying shares, betting that the company would rebound. At one point, Hertz shares become the No. 1 traded stock on the investing app Robinhood, popular with casual investors.
Eager to capitalize on its recent rally and demand for its stock, Hertz got approval Friday in bankruptcy court to sell up to $1 billion in new stock. In its filing, Hertz warned that the new common stock could “ultimately be worthless” because of the bankruptcy.
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However, the SEC, which is responsible for reviewing bankruptcy proceedings for regulatory issues, has questions about the stock sell-off.
Companies usually hold off on selling new shares when the SEC questions the offering and how the company disclosed risk to investors, Wall Street Journal reported.
“Hertz’s deal is more unusual than most because the company is in bankruptcy and has said that process may render its common stock worthless,” Dave Michaels wrote for WSJ. “The SEC’s intervention also is unusual because Hertz already had an effective set of disclosures for the fundraising. The company filed its disclosures in May 2019, and the SEC approved it in June of last year.”
Since Hertz had an effective set of disclosures, it didn’t need SEC approval to sell new shares, said Andrew Thorpe, a former SEC lawyer, according to WSJ.
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Hertz shares rose as high as $5.53 last week before falling to $2 on Wednesday, when trading in the stock was halted for several hours pending the company’s announcement.
“In most cases when you let a company know that the SEC has comments on their disclosure, they do not go forward until those comments are resolved,” SEC Chairman Jay Clayton said on CNBC earlier Wednesday.
Regulators expect Hertz to answer the SEC’s questions about its deal before it starts selling shares. “We at the SEC, we’re trying to carry out our responsibility in situations like this as best as we can. I expect the other professionals around this situation to carry out their responsibilities as best as they can,” Clayton said.