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Hertz apparently adopted a new strategy for managing debt: fraudulent bondholder voting.
How do companies rig votes on debt contracts? Now, Hertz wants to change the contract on a $750 million bond and requires the approval of at least 60% of the bond’s owners. It was necessary. The agreement also allows for the sale of up to $500 million in additional debt, increasing total debt to $1.25 billion. That’s what happened in a sale that ended Thursday.
The trick was that all newly issued bonds were automatically classified as “yes” votes. Therefore, the company announced today that it has reached the 60% threshold for changing the bond contract.
Yes, really! See the following lines from the SEC filing for this offering as reported by Covenant Review earlier this week:
Purchasers of additional First Lien Notes in the Offering will be deemed to have consented to the proposed amendments to the indenture governing the First Lien Notes.
This voter fraud strategy, Covenant Review says, is not new. Several companies have already pursued this policy, including Revlon Corp., among other debt issues, and Bombardier Inc. settled with bondholders over the tactic earlier this year.
Unlike Bombardier, Hertz’s voter fraud does not appear to be connected to any type of asset-stripping transaction. (At least not yet.)
Rather, this appears to be a ploy to gain room to take on more debt, according to Covenant Review, which says it is not aware of any other companies that have made this type of move regarding their borrowing capacity.
Hertz faces some uncertainty about the timing of some of its cash needs related to a separate court case pending over a $270 million payment to bondholders. . Analysts at CreditSights report that the company has withheld payments, but court arguments require the company to secure collateral for bondholders while it appeals the decision to the Supreme Court. It says that the focus is on whether or not. From CreditSights (CR’s sister publication):
We view Hertz’s actions (including its attempt to seek SCOTUS review, which we believe is unlikely to be successful) to be an attempt to delay payments to bondholders, and the company’s current liquidity It highlights the pressure.
The Covenant Review says Hertz’s voting irregularities may also be challenged. There is an argument that any changes to the debt limit would constitute a “sacred right” and would require the approval of 100% of bondholders.
Another interesting part of the debt amendment (also noted by the Covenant Review):
Another amendment. . . To add a proviso that so long as Canso holds any of the Notes, no additional Notes may be issued under the Agreement without the consent of Canso Investment Counsel Ltd.
This would require Canso’s approval for any new borrowing under this particular agreement (and of course does not preclude further borrowing at all), writes CR’s Ross Hallock. He continues:
. . . Canso is the same fund that stepped in as a white knight to buy up additional bonds issued by Bombardier to fend off bondholder lawsuits related to alleged breaches of terms related to the sale of virtually all of its assets. . . So the tactic of vote rigging is well known to Kanso. One may wonder if the voter fraud against the company was planned all along, and if Canso is using voter fraud as part of its theory to launch new types of investments.
If anyone has any thoughts on Canso’s endgame, please feel free to email me.