Hertz loops Ackman into upsized US$375m CB
One way for a company to raise money in a pinch is to persuade an existing shareholder to lend out their shares and issue convertible bonds. Even better if that shareholder buys more stock and lends a small portion of those shares to arb funds to hedge the downside exposure of purchasing those CBs.
Pershing Square’s Bill Ackman invested US$125m in Hertz Global to help facilitate a US$375m raise from the sale last week of five-year convertible bonds. The activist investor increased his Hertz stake to just under 10%, from 4.9%, and highlighted he will remain onboard by lending the new shares purchased for three years.
The battered car rental company’s shares rose one cent over the one-day marketing period on Monday to US$6.97, highlighting the benefit of the pre-hedged arrangement – fully 17.7% of Hertz’s shares were on loan to short sellers, making a CB issue a difficult proposition without Ackman’s help.
With that help in hand, Jefferies and Morgan Stanley were able to upsize the new CB offering to US$375m from US$250m and price it at a 5.5% coupon and 32.5% conversion premium, the aggressive end of 5%–5.5% and 32.5% fixed price talk.
Hertz used a portion of the new money raised to repurchase US$300m principal of 4.625% bonds that mature in December 2026, paring that obligation to US$200m. It also spent US$33.3m on a capped call to offset dilution from the CBs up to a share price US$13.94, double the reference price.
Hertz has another US$3bn of debt that comes due in 2029 (versus current liquidity of US$1.5bn), so the two-way debate is far from over.
Ackman is known for crafty financial engineering.
And while synthetic stock-borrow arrangements, such as a stock-loan facility or prepaid forward of stock, are nothing new, they are special when combined with a new equity investment.
High-end EV maker Lucid Group turned this same double-trick on a US$1.1bn CB issued in April that saw Saudi sovereign wealth fund PIF inject US$1bn through the earlier purchase of preferred stock, following up by lending stock to facilitate delta-hedging of the CB.