💥Hertz = "the Superstar," D&B = "the Survivor."💥

Who wouldn’t want to own a company with this ⬇️ a part of its historical record?

Things are moving fast AF and yet entirely on schedule in the Hertz Global Holdings Inc. ($HTZGQ) chapter 11 case. As previously discussed here, here, and here, there’s a full-blown auction going on now and while the ultimate winner remains subject to speculation and (presumably) a formal auction process to come, it’s becoming clear who some of the secondary winners are here.

For one, White & Case LLP. We busted some chops after the initial disclosure statement and breakup fee/fee reimbursement hearing went sideways on them (with Judge Walrath’s opposition to the third-party release mechanism being the cherry on top). But the rebound has been fast and furious. For starters, the case timeline remains on track. The Hertz debtors must be happy about that; they want out of bankruptcy as soon as possible. The economy is already on the rebound and people are spending money. Here is Mastercard Inc. ($MA) CEO Michael Miebach:

"We're encouraged by the return of domestic spending levels to pre-pandemic trends...U.S. retail sales were up 11.8% versus a year ago ex-auto ex-gas. This reflects the impact of fiscal stimulus and the lapping of the start of the pandemic."

And travel is on the rise. On May 2, TSA traveler throughput breached 1.6mm passengers for the first time in the last 12 months. Consequently, hoteliers are cautiously optimistic. Here is Wyndham Hotels & Resorts ($WH) CEO Geoff Ballotti:

"Consumer confidence is back, hotels are selling out again and our busy summer season is upon us. A period over the next six months where the U.S. Travel Association is reporting that nearly 9 out of every 10 Americans surveyed are planning to take a trip."

Though, they are concerned about their ability to service demand:

There’s also concern throughout the auto industry. With semiconductor shortages rattling the globe, auto OEMs are on record saying that they’ll have to dramatically reduce capacity. For instance, Ford Motor Company ($F) recently outlined a series of plant closures — including five in the United States — due to this growing issue; its CEO John Lawler acknowledged that the shortage reduced planned Q1 volume by 200k units (17%).😬 This is upending the rental car market. Per Bloomberg:

The semiconductor shortage has slashed vehicle production so much that rental-car companies can’t get the new cars they need, so they have resorted to buying used vehicles at auction.

This is uncharted territory for the likes of Hertz Global Holdings Inc. and Enterprise Holdings Inc., which have made their profits by purchasing new vehicles cheaply in bulk, renting them out for as much as a year and selling them at auction. In the past, they have bought some used cars to shore up an occasional unforeseen burst in demand, but rarely for the mainstays of their fleets.

“You would never go into auction to buy routine sedans and SUVs,” said Maryann Keller, an independent consultant who used to be on the board of Dollar Thrifty Automotive Group, which is now part of Hertz. “These are special circumstances. There is a shortage of cars.”

Getting the hell out of bankruptcy soon will allow the company to focus on these business challenges without the distraction of chapter 11 fund-on-fund drama. Moreover, management needs to focus on strategic partnerships to help satisfy demand:

While W&C may not be making friends with some of the big funds that are getting seesawed back-and-forth by the process — we can imagine super-fun investment committee meetings taking place over weekends — there’s no doubt that the process, however painful and wild it may be, is reflective of the aforementioned macro trends and is barreling forward in a manner that is maximizing value to the Hertz debtors’ estate. The latest offer from Knighthead Capital Management, Certares Management and Apollo Global Management to fund the car rental company's exit from Chapter 11 bankruptcy — confirmed yesterday morning by the company — is meaningfully higher than their initial plan sponsor proposal back in March and, consequently, appears to be the offer of choice at the moment. Per the company:

The revised proposal contemplates funding Hertz's Plan of Reorganization through direct common stock investments aggregating $2.9 billion, direct preferred stock investments aggregating $1.5 billion and a rights offering to raise $1.36 billion. The revised proposal includes an amended Plan of Reorganization that contemplates payment in full of all secured and unsecured funded debt and provides holders of common stock with $0.50 per share in cash and either 10-year warrants for an aggregate of 10% of the reorganized company or, for eligible stockholders, the possibility of subscribing for shares of common stock in the rights offering. The revised proposal is subject to a number of conditions including approval by the Bankruptcy Court.  

Hertz's Board of Directors has not yet made any determination regarding the revised proposal and will evaluate it in accordance with the procedures established by the Bankruptcy Court.

Someone alert Jay Powell that there’s another data point re: asset inflation! Query whether Jamie Dimon is factoring this into his overall macroeconomic assessment. 😜

Which gets us to another category of (theoretical) winners — shareholders!

Wait. What? Really? No, not really.

Don’t get us wrong: there’s actual value reportedly going to equity now (PETITION Note: Psssst, Dale, Hertz is still in bankruptcy). According to sources speaking to Bloomberg, the latest Knighthead offer would equate to a $2.25/share recovery to shareholders. This figure, of course, needs to be taken with a grain of salt given that most of it depends on rights and volatile warrants, etc., but still. The stock is clearly not “worthless” — as many feared when the company engaged in its highly cynical proposed stock issuance last year (which, to refresh memories, was approved on the basis of “business judgment” by Judge Walrath but almost immediately kiboshed by the Securities & Exchange Commission). And judging by the chart ⬆️, the market is pricing in additional value flowing to the bottom of the cap stack. Query whether most shareholders understand, as things stand now, how little of the “value” will come back to them in the form of green paper they can use to … uh … buy sh*t. Query also how those bagholders … uh, we mean, stonkholders … oops, damn, shareholders! … who “invested” in Hertz stock in June 2020 feel right now, carrying a cost basis of $5.53/share. So, yes, designating them winners is perhaps a wee bit generous. It’s a Pyrrhic victory, maybe.

We’ll continue to monitor the latest and greatest on the bidding and auction process.

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💪The Survivors. Part II. 💪

Few retail businesses were able to not only whether the pandemic, but also emerge (possibly) better positioned for the recovery. Dave & Buster’s Entertainment Inc. ($PLAY) had an active start to 2020, even before the pandemic kicked in, KKR & Co. Inc. ($KKR) reported a 10.7% stake in the company, noting that it may seek to affect an M&A transaction or changes to the board. While a KKR director was ultimately appointed to the board, the company thought it prudent to implement a poison pill, just in case any other sponsors wanted to get opportunistic after seeing D&B’s price crash at the onset of the pandemic.

We previously discussed how Dave & Buster’s wasn’t exactly entering the pandemic from a position of strength, having reported disappointing comp sales results in late 2019. When the company announced its second PIPE transaction of 2020, we noted how “PLAY is now a poster child for retail’s survival instincts,” outlining the concessions management extracted from landlords and creditors.

While Dave & Buster’s saw its revenues collapse during 2020, much of the negative impact was effectively absorbed by its landlords, vendors, and employees. In light of the COVID-related closures and reduced demand, the company furloughed nearly all of its store workforce in mid-March, bringing them back at reduced staffing levels as stores re-opened; reduced spend on marketing and maintenance of stores during closures; and tapped the capital markets, which were more than willing to provide liquidity. The reduced operating expenses offset nearly half of the company’s decline in gross profit, with the employee furloughs and reduced operating spend contributing $205mm and $130mm in savings, respectively. By October 2020, the company refinanced its term loan with a $550mm issue of senior secured notes, and used the balance to pay down most of its outstanding revolver balance. Concurrently, revolver lenders extend the $500mm facility through 2024. While it was hard to be optimistic about D&B’s business prospects at the time, by late 2020 the lender dynamics had turned in favor of issuers. Or, as we put it:

The Fed stepped in (Jay POW-ell!), the capital markets opened up (Yield, baby yield — Ligado for f*ck’s sake), and one company after another issued new debt (and/or equity) and kicked the can down the road. We highlighted this dynamic late last month in the case of SeaWorld Entertainment Inc. $SEAS)(see also Dave & Busters Entertainment Inc). Both bank and private credit lenders have proven to be extremely forgiving with covenant relief (PIK is back baby!). Sponsors also: checkbooks are out. Portfolio companies have “a bridge” to sell them. Consequently, even small to middle market activity has been below expectation.

By this point in time, commercial landlords across the country were reminded that, contrary to accounting conventions, the NPV of future lease payments does not always equal the sum of expected payments discounted to present value. Which LizardBrain notes in the case of Cheesecake Factory ($CAKE):

If the net present value of a lease liability is truly equivalent to debt, there would be no more of a reason to dread bankruptcy court than any other creditor beyond the risks of having to pay your own interest while not getting paid on your own “debt” claims.

But what if that’s actually not true, and Cheesecake knows it?

Because, spoiler alert, it’s not true. It’s a fiction of sorts promoted by financial theorists and academics that has little basis in reality. Why?

Section 502(b)(6) makes it very clear why, by capping the allowable claims of landlords at the greater of one year’s worth of rent or 15% of the remaining rent owed over the lease term to a maximum of three years worth of rent.

Certainly, that is a claim… But The Cheesecake Factory had an average remaining lease term of 16.6 years as of its last 10-K.

My arithmetic is not so good having been taken out of the 4th grade, but I’m just gonna go ahead and take a stab that the NPV of 16.6 years worth of rent is a lot higher than the cap instituted by Section 502(b)(6) would ever let landlords collect.

Dave & Buster’s knows this too, from the company’s annual report:

[Dave & Buster’s] negotiated with our landlords, vendors, and other business partners to temporarily reduce our lease and contract payments and obtain other concessions. During fiscal 2020, a total of 126 rent relief agreements related to our operating locations and corporate headquarters were initially executed, which generally provide for full deferral for three months beginning April 2020, with partial deferral continuing for periods of up to six months, at approximately 50% of those locations. As the pandemic continued to impact our business into the fourth quarter, the Company renewed negotiations with the majority of these landlords in order to provide additional rent relief, generally seeking to push out or extend the terms of deferral pay back periods and/or provide rent relief beyond the periods in the initial agreements. As of the end of fiscal 2020, the Company had executed 17 of these additional rent relief agreements. (emphasis added)

With malls and other landlords suffering from the loss of tenants who permanently shut their doors during the pandemic (see also: “Mall Fall” and “Is More Mall Pain Ahead?”), the retailers left standing appear to have lessors over a barrel.


Elsewhere in trickle down losses, Dave & Busters is rethinking its advertising strategy, aiming to stop fixed buying across cable media. Here is CEO Brian A. Jenkins, from the company’s FQ420 earnings call:

Obviously we -- when we hit COVID, we shut down every element of our media spend we could, as our stores were shut down; and canceled whatever we could out of our upfront buy, cable. And we had a little bit of media running for us in the third quarter, but in this kind of environment, number one, we are locking into a more fixed -- cable buy is not something we're really wanting to do, number one. We want to be pretty flexible with the media plan. And then secondly, as I look at how our stores are recovering right now with limited media, we're super encouraged by that. We had an sort of always-on strategy. We've gotten ourselves, as you point out, to [ being on TV ], on some channel virtually every week of the year. And so strategy this year as we come out of this COVID situation, and we're going to learn some things by it, is to pivot more heavily into digital channels. We spent a significant amount of effort during the COVID shutdown on developing out our marketing tech stack and it is our intent to utilize that to really reach our guests where they are, and that's not always on broadcast TV. So we're going to lean into that much more heavily than we had anticipated pre COVID.

For avoidance of doubt, the “little bit of media running for us in the third quarter” was effectively “dollars that we were unable to cancel,” per the company’s prior quarter’s earnings call. The shift is hardly a surprise, given continued cord cutting by consumers. In a presentation during the ICR Conference in January, management noted that 80% of D&B’s marketing tech stack has been deployed over the last twelve months.


PLAY recently announced early results for the first 11 weeks of its 2021 fiscal year and increasing Q121 revenue expectations to $252-257mm range, up from prior guidance of $210-220mm. As of mid-April, 138 of the company’s 141 stores are open, albeit with most locations operating at reduced hours and capacity. For the year ended January 2021, the company opened six new stores, while closing two locations in Chicago and Houston. Increased openings boosted the number of operational comparable stores to 81% of 2019 levels, up from a rate 52% in Q420. Comp sales were down 38% from 2019, and CEO Jenkins expressed optimism about recently reopened locations across New York and California. Previously, the company announced it expected positive enterprise-level EBITDA for the first fiscal quarter, “baring renewed operating restrictions or store re-closures … due to a COVID resurgence.

Absolutely no one seems to think a resurgence is likely given the rate of vaccinations and the decline in cases (though scientists are apparently looking at India with a watchful eye).


We have updated our compilation of a$$-kicking resources covering restructuring, tech, finance, investing, economics and disruption. You can find the full compilation here. One new book we’re keen to check out is “The New Builders: Face to Face With the True Future of Business” by Seth Levine and Elizabeth McBride.


Brett Miller (Partner, Global Head of Creditor Rights) joined Willkie Farr & Gallagher LLP from Morrison & Foerster LLP.

Claudia Springer joined Novo Advisors from Reed Smith LLP.

Dennis Jenkins (Partner) joined Willkie Farr & Gallagher LLP from Morrison & Foerster LLP.

Frank Selke (Associate) joined Stikeman Elliott LLP from Voorheis & Co. LLP.

Haider Malik joined Blackrock from Ducera Partners LLC.

Jacob Czarnick (Managing Director) joined Raymond James from Perella Weinberg Partners.

Laurence Sax (Senior Managing Director) joined Mackinac Partners from Gordon Brothers.

Marcus Helt (Partner) joined McDermott Will & Emery LLP from Foley & Lardner LLP.

Todd Goren (Partner) joined Willkie Farr & Gallagher LLP from Morrison & Foerster LLP.

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