Hertz has been around for just over a century. It was started by a fellow name Jacobs in the city of Chicago with a very modest fleet consisting of about a dozen Model Ts. The ensuing years would find the growing franchise initially as a small business owned by John D. Hertz (of course!), and over the ensuing years, as a subsidiary of corporate titans such as General Motors, Radio Corp of America, United Airlines, and Ford. It eventually went through what was then considered to be a large LBO transaction with a syndicate of PE firms circa 2005, and the mountain of debt began to grow. COVID19 might be listed as the cause of death in the news cycle coming out of the bankruptcy filing last week, but this patient has been sick for a very long time. The corporate obituary indicated debt of about $20B, a 2019 operating loss of almost $60M, and only $1B of liquidity left on hand.
The current pandemic has produced a tsunami of personal and economic pain and suffering. In the case of Hertz, it merely accelerated the inevitable but there is a broader story at play here. The so-called good times never last forever, yet corporate leadership seems to pretend that they do. Like the sovereign who they assume will always be there to provide the rainy-day capital, they too pay little attention to how, if, and when the liability side of what should be considered a stakeholder’s balance sheet will eventually be sized to comport with a sensible business model.
Then there is stewardship. This is the type of long-term visionary who has not mortgaged the hell out of the future ambitions and interests of her employees, vendors, citizens of the local communities where they operate, debt holders, and of course the equity owners. This is a rare and elusive breed that often does not come out in times of crisis expecting someone else to shoulder the responsibility and blame for their own short-sightedness. As the unattended garden hose of monetary and even fiscal stimulus indiscriminately sprays away, the stewards are nowhere to be found. They have built a sustainable franchise and avowed to never take the short-term spoils for themselves. Their responsibility is simple and clear: when done, hand-off the enterprise in even stronger shape than when she was first asked to manage it, grow it, and ultimately preserve it. If this sounds like fantasy land to you, we may as well dig a grave next to Hertz with the tombstone marked ‘Stakeholder Capitalism.’
Like Hertz, this game of leveraged roulette has its limitations and the sooner we stand up and recognize that, the better chance we have against the looming climate and retirement crises and whatever else might just show up in between. CAIA Association continues to raise the content specter on this topic and our recent addition of an ESG module to our Fundamentals of Alternative Investments certificate program is part of the minimum table stakes to be both an investor and a responsible steward of this planet.
As for Hertz, let us watch and see how this one plays out. The smart money (code for GPs) has already amassed an impressive position in credit default swaps, and a host of debt and lease holders have no doubt lawyered up… but what about the 38,000 employees, almost half of which have already been furloughed or sacked? They are now in a new world of ‘hurts’, and there is no steward in sight to go see about their rights.
Seek diversification, education and know your risk tolerance. Investing is for the long term.