Hertz Fleet ABS (2020) — AAA Survives Bankruptcy

In March 2020, COVID-19 brought global travel to a halt. For Hertz Global Holdings, one of America's largest car rental companies, this meant revenue effectively went to zero. Car rental income evaporated overnight, but vehicle lease costs, ABS coupon payments, and maintenance continued.

Hertz carried $19B in debt. Of this, approximately $14B was ABS issued to finance vehicle purchases. On May 22, 2020, Hertz filed for Chapter 11 bankruptcy protection in Delaware. The century-old car rental giant had fallen.

Market shock: investors in Hertz ABS panicked at the bankruptcy news. What would happen to $14B of ABS? But the answer was already written in the structured finance textbook.

Hertz's vehicles were owned by Hertz Vehicle Financing LLC, an SPV. Hertz Global Holdings had transferred the vehicles to this SPV via True Sale, with the SPV issuing ABS to raise funds.

The critical bankruptcy question: if Hertz Global Holdings goes bankrupt, do the SPV's assets (approximately 500,000 vehicles) belong to the bankruptcy estate?

Court's answer: No. The SPV's vehicles do not belong to Hertz Global Holdings' bankruptcy estate. True Sale was established. The SPV's vehicles could be independently liquidated or managed.

Actual outcome: the bankruptcy court allowed the SPV to continue operating under the ABS agreements. As rental operations resumed, vehicles continued generating revenue; some were sold in used car markets. Used car prices surged in 2021 due to semiconductor shortages — an unexpected positive for Hertz ABS investors.

Hertz's ABS was structured with a traditional senior-subordinate waterfall.

AAA senior tranches: fully repaid. While coupon payments were temporarily delayed during bankruptcy, principal and interest were ultimately fully recovered. Bankruptcy isolation worked as designed.

AA/A tranches: fully or nearly fully repaid. Vehicle values held better than expected, and the 2021 used car price surge provided additional cushion.

BBB/BB mezzanine tranches: some losses occurred. Through bankruptcy proceedings and ABS restructuring, mezzanine investors had to accept certain discounts.

Equity tranche (held by Hertz): effectively worthless during bankruptcy proceedings. Losses concentrated in the equity tranche as designed.

Conclusion: the waterfall worked as intended. Even in the worst-case scenario (bankruptcy), senior investors were protected.

Hertz's bankruptcy had a strange episode. After the May 2020 bankruptcy filing, retail investors piled in and Hertz stock price surged — a 'meme stock' phenomenon investing in worthless shares.

Hertz even sought bankruptcy court approval for a new equity offering (issuing new shares while in bankruptcy) — the court allowed it with the condition that investors be warned of the risks of bankrupt stock. The plan was withdrawn as the price fell again.

From ABS investors' perspective, this episode offers another lesson: throughout the bankruptcy, the ABS SPV remained separated from the Hertz parent company. Whether the stock rose or fell, ABS investor returns were tied solely to vehicle values. A true demonstration of bankruptcy remoteness.

The Hertz case clearly demonstrates how the core principles of structured finance work in practice.

Bankruptcy Remoteness: the principle that assets transferred to an SPV are legally separated from the originator's bankruptcy was validated at $14B scale. This is not theoretical.

Waterfall effectiveness: the principle that AAA tranches recover before and more than BBB tranches was replicated exactly in the Hertz case.

Importance of collateral assets: the physical asset collateral — vehicles — made this possible. Vehicles can ultimately be sold. As long as a used car market exists, auto ABS has a last line of defense.

Post-COVID ABS market: the Hertz case reconfirmed the robustness of ABS structures. Through the 2020–2021 COVID shock, AAA tranches of auto, card, and student loan ABS largely suffered no losses.