Hertz Global Holdings Inc (NYSE:HTZ) warned prospective new stock investors that they will be wiped out as the car renter proceeds to sell up to $500 million in new shares amid its bankruptcy. The company is proceeding with an improbable share sale as it takes advantage of a strong rally in its stock since it filed for bankruptcy last month.
In a warning to prospective new stock investors, the car renter said it’s almost certain that the equity will become worthless. However, it noted that the sale, which is part of the $1 billion that it announced, last week, could benefit creditors that seek to recover their claims as the company goes through the bankruptcy process.
Hertz to raise $1 billion
In a ruling, U.S. Bankruptcy Court Judge, Mary Walrath, approved the company’s plan to sell $1 billion worth of new shares. The judge ruled that Hertz, which filed for Chapter 11 protection in May with debts amounting to around $20 billion, could raise as much as $1 billion through the sale of new shares. The company filed papers with the Securities and Exchange Commission on Monday for the sale of 500 million shares. In its bankruptcy plan, the company intends to settle equity holders with senior claims, including bondholders, before extending to those with junior claims. According to the company, the plan will require a rapid and significant improvement in business conditions.
The company’s share fell 37% on Monday, although its stock is still trading well above where it initially traded after the company filed for Chapter 11. Last week a bankruptcy court judge approved the equity sale after Hertz agreed to alert potential buyers of the risk of being wiped out.
The stock sale is a rare move for any company going through a bankruptcy as common shareholders will be the last to be settled when assets are allocated during court proceedings. Companies and people with Hertz’s bonds will be paid first as debtholders receive priority during bankruptcies.