Hertz Filed for Bankruptcy and the Stock Went Up
A company in Chapter 11, where shareholders sit last in line and usually recover nothing, saw its shares surge on retail buying. It then tried to sell new stock into that demand, which is where regulators stepped in.
What Should Have Happened
When a company files for Chapter 11 bankruptcy protection, there is a well defined order for who gets paid. Secured creditors come first, then unsecured creditors, then preferred shareholders, and common shareholders come last. This ordering is called the absolute priority rule, and it is not a guideline. It is the structure of the claim.
In most Chapter 11 cases, the value of the business is less than what is owed to creditors. When that is true, common equity receives nothing. The shares are typically cancelled and new shares are issued to creditors as part of the reorganization. That is the ordinary outcome, and it is what most participants expected when Hertz filed in late May 2020.
What Actually Happened
The stock rallied sharply in the weeks after the filing. Trading volume exploded, driven substantially by retail brokerage accounts at a moment when a large wave of new investors had arrived, stimulus payments had landed, and sports betting was largely unavailable.
Then the situation became genuinely unusual. With its shares trading at elevated prices, Hertz sought and briefly received court permission to sell up to 500 million dollars of new stock. A bankrupt company proposed issuing equity that its own filings acknowledged would likely end up worthless. The Securities and Exchange Commission raised concerns and the offering was abandoned after a small amount had been sold.
The company told buyers in writing that the shares would likely be worth nothing, and buyers kept buying. The disclosure was not the problem.
Why the Capital Structure Is the Whole Lesson
Equity is a residual claim. Shareholders own what remains after every obligation is satisfied. In good times that residual is where nearly all the upside lives, because debt holders receive a fixed payment no matter how well the business performs.
In distress, the same structure works in reverse with brutal efficiency. If liabilities exceed asset value, the residual is zero, and it is zero regardless of how recognizable the brand is or how many cars sit in the lots. Hertz had real assets and a real business. It also had debt against those assets that exceeded what they were worth when used car values were uncertain and travel had stopped.
The Detail That Made It Worse
Much of Hertz's fleet was financed through asset backed securities, where the cars themselves serve as collateral. Those structures contain covenants requiring the borrower to maintain a certain value of collateral against the debt. When used vehicle prices fell and rental demand collapsed, Hertz faced demands to post additional collateral it did not have.
This is the mechanism that turns a bad quarter into a bankruptcy filing. The business did not run out of customers permanently. It ran out of the ability to satisfy a contractual obligation at a specific moment, which is a liquidity failure operating on a legal deadline.
The Postscript Worth Knowing
Used car prices recovered dramatically in 2021, and Hertz's assets ended up worth far more than anyone assumed during the filing. Shareholders in that unusual case did receive a recovery, which is genuinely rare. It is important not to draw the wrong conclusion. Buying bankrupt equity worked here because of an unforecastable surge in used vehicle values, not because the analysis behind the purchase was sound.
The Bottom Line
Hertz is the cleanest available illustration of what owning equity actually means. Shareholders are last in line, and in bankruptcy last in line usually means nothing at all, whatever the ticker happens to be doing that week.