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Contrasting Fortunes

24 June 2020 by lberuti

The pandemic which is still gathering steam across the globe has brought a number of sectors to their knees. The car rental industry ranks among them and HTZ (The Hertz Corporation) filed a bankruptcy petition on May 22, 2020. The auction to settle the level of its recovery (ie how much CDS owners will receive in compensation for every dollar of debt they insured) was held today, and early indications point towards a recovery in the region of 25% (ie each $1 of CDS will pay out 75cts). While HTZ’s investors had to digest this bad piece of news, bondholders of another stressed car rental company, EUROCA ( Europcar Mobility Group ), enjoyed a fairly good session. They were told that VW ( Volkswagen ) could be exploring an offer for the company. VW’s rationale would be to expand their mobility service offerings, including rental and leases programmes for new and used electric cars. But the timing looks a bit odd given the current uncertainties and the challenges already facing VW. Acquiring EUROCA is certainly cheaper today than at the beginning of the year, but hardly a game changer for a company the size of VW. In any case, if a deal materialises, EUROCA’s bonds have a meaningful upside (they currently trade at 70cts on the dollar) and, on top of any credit profile upgrade, CDS would also benefit from an increase probability of orphaning. Unsurprisingly, EUROCA’s 5-year CDS closed 10pts tighter on the day.