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Hertz And Other Troubled Companies Already Needed Bailouts

The century-old Hertz filed for bankruptcy—protection from the companies and individuals to which it owed so much—at the start of the Memorial Day weekend.

President and CEO Paul Stone, quoted in a press release, claimed the company had entered 2020 “with strong revenue and earnings momentum.”

They were not, according to data from S&P Capital IQ. The last 12-month (LTM) revenue at the end of March was $9.6 billion, compared to the $9.8 billion on December 31. LTM gross profit margin was 15.5%, down from 17.7% in 2019. Net earnings were down 2.7% year-over-year.

And debt. Oh, how the debt flowed at 1,385.2% of equity. Close to 14 times higher than the amount of equity shareholders and almost all of it long-term. The significant risk for investors wasn’t new.

Reality arrived last week when Hertz missed an April 29 payment and then laid off 10,000 employees. Victim of a virus? Clearly a factor, but fiscal comorbidity was one as well. The company was too heavily leveraged.

A recent change in leadership suggests that things were difficult. Stone became CEO on May 18. Previous chief executive Kathryn Marinello was thanked by the board for a “successful operational turnaround” and wished “all the best.” Presumably, she would have been responsible for that “momentum” in her several years as CEO.

Ah, well, women too frequently get the CEO nod when times are bad and male candidates don’t want the responsibility. When situations improve, it’s often time to go back to the usual.

Even with improvement, the company remained in difficult shape. The circumstances around the coronavirus and collapse of travel highlighted the existing problems.

Hertz is not a solo traveler. Many companies joined it in the high occupancy lane of extensive leverage. When infelicitous conditions acted like a GPS, pinpointing their race toward potential default and even insolvency, corporate titans and investors want help.

Hertz now occupies the driver’s seat of bankruptcy, which externalizes its woe and distributes the losses among vendors of all size. Many companies won’t need that route.

Since the middle of May, the Federal Reserve has been snapping up corporate bonds, including those that from so-called fallen angels—once companies with investment-grade debt to sell, brought low by credit downgrades.

In one sense, the Fed had little choice. To allow markets to take their inevitable path would leave major investors—including corporations, pension funds, and others—stuck with bad debt and unable to unload it when they needed cash. Credit markets would begin to freeze up, increasing the prospect of a depression multiple fold.

But need doesn’t make right. Compare the treatment to the millions who haven’t been able to pay rent or other costs of living. Many of them may soon face the street. “They should have planned better,” the voices behind wagging fingers will say. Why couldn’t they simply save up six months or so of living expenses out of low-wage jobs when they might not have afforded healthcare?

Why couldn’t small businesses do the same?

None of them could, but they are held to higher standards than the disciples of the market.

Modern “capitalists” and lovers of “free” markets are like hunters who fear the veldt and woods. They prefer commercial game preserve with a comfortable perch in a swift vehicle and armed guides who can ensure their safety.

When things go bad, they are first in line to stress their need for bailouts. Yes, yes, of course free markets are necessary. Just not wise right now.

It never seems time for equal justice. Maybe next generation, when the same things happen because national and international mechanisms encourage risky behavior. Even seeing the numbers that foretell impending doom, the investment class wants to squeeze out that last penny of profit.

When rich Uncle Sam will bail you out, why not?

And if you can blame a pandemic, so much the better.

Source: Forbes – Money

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