Morgan Stanley sets base case for Hertz at zero, sees small chance equity holders get some value

Published Mon, Jun 22 20209:41 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

(This story is for CNBC Pro subscribers only). Shares of bankrupt car rental company Hertz are likely going to zero, leaving shareholders with nothing, according to Morgan Stanley. The stock has been the source of speculative trading in recent weeks, swinging wildly since it filed for Chapter 11. The interest in the stock led to a short-lived plan by the company to do a secondary stock offering, which raised concerns at the Securities and Exchange Commission. Morgan Stanley did leave the door open of a "bull case" which allows for Hertz equity holders to recover some value. Analyst Adam Jonas said in a note to clients that the failed equity raise motivated him to slash his base case to $0 from $2 per share. "We are now more concerned that there is a potential risk of a NYSE de-listing, or potential liquidity shortfall where the company may exhaust available cash to run the business by the end of 2020, potentially leaving the equity with little or no residual claim," the note said. In a bankruptcy process, common shareholders are the last in line to recoup the losses on their investments and are often wiped out completely. The stock closed at $1.73 per share on Friday. Jonas also cut his price target for a bull case scenario to $3 per share, down from $8, saying the company will need some sort of financing package to remain operational and recover some money for equity holders. In modeling the bull case, Morgan Stanley looked at a hypothetical equity raise of $500 million that would require the amount of outstanding stock to increase by more than 200%. Other options for recapitalizing the company, such as raising debt, could also limit potential gains by shareholders, the note said. Other options for Hertz to raise cash could include franchising locations or selling European operations and the Donlen subsidiary, but "what is unclear are the debt obligations assigned to these businesses," the note said. "In summary, while there may be potential scenarios to secure near-term financing that can preserve positive equity in the short-term, we see the risk of larger amounts of corporate debt, a de-listing and/or significant sharecount dilution in the future," the note said. Even that tempered bull case is unlikely, Jonas said. An official de-listing from the NYSE, which Hertz is currently appealing, could be the catalyst that drives the stock to zero, the note said. "Ultimately, given the binary nature of potential scenarios, our new Base Case reflects our view that our Bear Case has a higher probability of occurring than our Bull Case," the note said.

The desk of car rental company Hertz is seen at Nice International airport during the coronavirus disease (COVID-19) outbreak in Nice, France, May 27, 2020.

Eric Gaillard | Reuters

(This story is for CNBC Pro subscribers only).

Shares of bankrupt car rental company Hertz are likely going to zero, leaving shareholders with nothing, according to Morgan Stanley.

The stock has been the source of speculative trading in recent weeks, swinging wildly since it filed for Chapter 11. The interest in the stock led to a short-lived plan by the company to do a secondary stock offering, which raised concerns at the Securities and Exchange Commission.

Morgan Stanley did leave the door open of a "bull case" which allows for Hertz equity holders to recover some value.