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Car rental company Hertz is raising new debt to pay down its revolver at an awkward time, as its ambitious pivot to electric vehicles and charging infrastructure runs into operational challenges.

Since emerging from bankruptcy in 2021, Hertz has been pushing to electrify its fleet, rent EVs to Uber drivers, and invest in badly needed charging infrastructure at its sites across the US.

It’s an ambitious and forward-thinking strategy. But just like renting an EV for the first time, it has often proved costlier and more complex than expected.

Damage and collision repair costs on electric vehicles have been running around double that of combustion engines, and resale values have been lower than expected as manufacturers cut pricing. Hertz is also dealing with customer frustrations with the vehicles, as drivers grapple with ‘range anxiety’ and the operational challenges of charging EVs.

This has all had an impact on the company’s bottom line. Hertz generated $359m of adjusted EBITDA in Q3, down 42% year-over-year; according to CEO Stephen Scherr, the company’s EBITDA margin of 13% would have been “several points higher” if the fleet had no EVs. 

“That’s pretty huge,” said one credit analyst of the impact, given the company has said EVs only comprise 11% of its fleet.

Hertz expects some of these pressures to ease in time, but is now slowing the rate at which it adds EVs to the fleet. The company is no longer on track to meet its target of a 25% EV fleet by the end of 2024, although management remains committed to this overall strategy.

“I think there’s no technology change, EVs included, that run a straight line without some hiccups and challenges, and that’s this,” said Scherr in an interview with CNBC last month. “The line from A to B is not always straight, it’s not that here.”

Against this difficult backdrop, Hertz is now attempting its first debt raise at the corporate level since emerging from bankruptcy.

The company, which is rated B2/BB-/B at the corporate family level, is looking to raise a non-fungible $400m add-on to its existing June 2028 TLB. 

Lead arranger Barclays held an investor call Tuesday for the loan, which is talked at 375bps-400bps over SOFR with an OID of 97.5-98. Commitments are due 15 November at 12pm ET.

Raising additional secured debt — in floating rate format, no less — will encumber more assets, as well as priming unsecured lenders. That said, the tighter pricing versus unsecured debt provides a strong incentive to make use of any available collateral, given where the SUNs are trading:

Yields on Hertz unsecured debt have climbed into double digits (Source: 9fin)

Then again, this decision doesn’t come without some collateral damage (ha!). Fitch, which this week changed its outlook on the company-level rating to negative, expects to downgrade its rating of Hertz’s unsecured debt by one notch to B- because of the increased subordination.

Net corporate leverage (which excludes vehicle-based debt, such as ABS) was 1.9x based on $2.3bn of outstanding corporate debt at the end of Q3, the company said. That’s slightly above management’s target of around 1.5x. 

The company had $1.7bn of available liquidity at the end of the quarter, including approximately $600m of unrestricted cash.

In the most recent lender call, Hertz executives described 2023 as a “year of transition” and said its initiatives to boost revenues and lower costs would bear fruit in 2024. These efforts include:

Improving vehicle sales by partnering with Carvana

Learning from early experience to reduce incremental EV costs and improve margins

Closing the pricing gap to competitors with its budget Thrifty and Dollar brands

Boosting the rideshare (renting EVs to Uber drivers) business

Together, the company says these could add $500m of incremental EBITDA through 2025 as these strategies mature. That’s some way from now, though — and Fitch points out that seasonal slowdowns and the challenged operating environment could push leverage higher in the near term. 

Similarly, a portfolio manager following the deal expressed concern that some of the market tailwinds that drove rental demand and pricing through 2022 could fade.

“I thought the auto strike would have helped them if it had dragged on longer,” the PM said. “Maybe you get fewer new cars, and that helps them by driving up used car values. But with the strike over, people are more worried about consumer demand for travel and spending on leisure.”

Barclays declined to comment. A spokesperson for Hertz sent the following via email:

“As disclosed in Hertz's quarterly filings, almost $360m of borrowings under the first lien revolving credit facility were repaid during Q3 of 2023. Overall, Hertz has a very strong liquidity position. As previously disclosed, at 30 September, Hertz’s available liquidity for general corporate purposes was $1.7bn, and its capacity under its rental car asset-backed facilities aggregated to $2.1bn globally.”

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