On May 26, 2020, Hertz Global Holdings Inc. ($HTZ) and a number of affiliates filed massive chapter 11 bankruptcy cases. The company’s publicly-traded stock dropped to $0.56/share. Thereafter, the stock inexplicably started to rise. On Thursday June 4, HTZ stock experienced a sudden and mysterious surge that had everyone who knows anything about chapter 11, the absolute priority rule, and the typical bankruptcy treatment of equity (read: it typically gets wiped out) a bit befuddled. The surge continued through the beginning of this week — reaching as high as $5.53/share on Monday, June 8th. The Twitterverse, in particular, went apesh*t as Dave Portnoy and other gamblers … uh, investors … took aim at HTZ and several other cheap stocks on the (un)sound (un)fundamental basis of their … well, cheapness.

Most folks could predict that it wouldn’t end well. After all, HTZ is, to state the obvious, BANKRUPT!, its debt trades like dogsh*t and its equity is currently the subject of a delisting notice. Still, folks like Jim Cramer and Josh Brown all but encouraged the behavior, back-handedly claiming that it’s a good “learning opportunity” for these (predominantly new) market participants. As of market close on June 11, the stock has fallen back down to earth, trading at $2.06/share leaving many a now-learned investor in its wake.

Still, one’s foolishness is another’s opportunity.

In a motion filed June 11 (along with a complementary motion seeking shortened notice and an emergency hearing), the HTZ debtors seek authority to enter into a sale agreement with Jefferies LLC to issue up to and including 246,775,008 shares of common stock through at-the-market transactions under HTZ’s existing shelf-registration — a move designed “to capture the potential value of unissued Hertz shares for the benefit of the Debtors’ estates.” The debtors opportunistically note:

The recent market prices of and the trading volumes in Hertz’s common stock potentially present a unique opportunity for the Debtors to raise capital on terms that are far superior to any debtor-in-possession financing. If successful, Hertz could potentially offer up to and including an aggregate of $1.0 billion of common stock, the net proceeds of which would be available for general working capital purposes. Unlike typical debtor-in-possession financing, the common stock issuance would not impose restrictive covenants on the Debtors and would not impair any of the creditors of the Debtors. Moreover, the stock issuance would carry no repayment obligations, and the Debtors would not pay any interest or fees to those who provide the funding by buying shares at the market. Hertz would include disclosure in any prospectus used to offer common stock highlighting that an investment in Hertz’s common stock entails significant risks, including the risk that the common stock could ultimately be worthless. (emphasis added).

Congratulations people. The very folks that Cramer and Brown talked about have been marked as fools. And people erupted:

Our inbox immediately flooded with messages reflecting incredulousness and lost faith in humanity. We get it. This is next level sh*t right here. Dumb motherf*ckers are about to get taken advantage of.*

But you know what? Maybe we just want to be contrarian, but we are impressed with this move.** Look, for the last week the market has been awash with commentary about how nothing makes sense anymore and how “the Fed put” has introduced all kinds of bubble-like behavior. Idiots off of Robinhood have been (maybe) getting rich off of $HTZ stock and $CHK stock and $WLL stock while legends like Ray Dalio, Stanley Druckenmiller and Warren Buffett are eating sh*t. Like…this actually happened:

Proponents of efficient markets have been apoplectic. None of this makes any sense to them. For good reason.

But you know what does make sense? Basic supply and demand. And if there is enough demand for something as asinine as acquiring a portfolio of HTZ stock and HTZ alone can quench that demand, why wouldn’t and shouldn’t it issue those shares? Isn’t that efficient markets playing out in their harshest and most savage form? Isn’t it more efficient for the debtors to issue more stock than pay some usurious coupon on a DIP credit facility? Why get ripped off by lenders when you can rip off aspirational equityholders?

The HTZ debtors have a duty to maximize the value of their estates.*** To use or sell property of the estate, the debtors merely need to show that the use/sale is an exercise of sound business judgment. They write:

Here, the decision to enter into the Sale Agreement and to sell unissued shares of Hertz’s common stock is an exercise of the Debtors’ sound business judgment. The rise in the trading price of Hertz’s shares indicates that the market believes that the shares have significant value. The proposed sale of Hertz’s unissued shares would allow the Company to raise up to and including $1.0 billion in gross proceeds, the net proceeds of which the Debtors could use general working capital purposes. The sale would also allow the Debtors to raise capital on terms superior to any debtor-in-possession financing. The stock issuance would not impose restrictive covenants on the Debtors and would be junior to claims of the Debtors’ creditors. Moreover, other than the 3.0% fee that would be owed to Jefferies and related transactional costs, the issuance of the shares would impose no payment or repayment obligations on the Debtors. (emphasis added).

Do the debtors have some sort of duty to those prospective shareholders that are about to get dragged over the tracks? Do the debtors need to be concerned about the business judgment of the morons on the other side of the transaction?**** Does a prospectus describing the dangers eliminate any and all responsibility here? The debtors are clearly of the view that the answers are ‘no’ and ‘yes,’ respectively.

Notably, Jefferies ain’t no fool. In addition to getting 3% of the gross proceeds of any shares that are sold through the proposed ATM program, they’ll get a crucial indemnity from HTZ “…based upon or otherwise related to or arising out of or in connection with Jefferies’ participation, services or performance under the Sale Agreement or the sale of shares or the offering contemplated hereby, provided that the Company shall not be liable to the extent a court determines a claim resulted directly from Jefferies’ gross negligence or willful misconduct.” Moreover:

The Company will also agree to reimburse Jefferies for any and all expenses reasonably incurred by Jefferies in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action.

Jefferies saw the equity price action this week and be like…

…and immediately dusted off that same ATM pitch they’ve used in plenty of other situations. In the process, they make no mistake about it: they know they’re about to get dragged in some mud.

And so where does this leave us? It’s not a bankruptcy court’s jurisdiction to protect the Robinhood bros. They’re not parties in interest in the cases. The debtors will likely get authority pursuant to their motion and Jefferies will try and push shares into the market and, in turn, the market will prove whether there’s continued demand. If there’s more demand, the debtors will then have an option to sell more shares on the basis of that demand.*****

As to whether there is some mysterious way that the equity ultimately has value in the future? Not to cop out on the question but we simply don’t have enough information to opine on that. Likely, neither do the debtors. Nor the Robinhood traders. Will travel recover? Will the used car market sh*t the bed? In a pandemic, anything goes. And that’s the point of the debtors’ motion and precisely why, all the furor notwithstanding, it actually makes sound business sense for them to move forward with it.

A hearing on the motion is scheduled for tomorrow, June 12th, at 3pm ET. Pop your popcorn.

*Meanwhile, some HTZ directors are laughing their asses off after hitting the top right on the head:

**We fully acknowledge that we may regret this hot take at a later time.

***The debtors actually argue that, pursuant to certain case law, unissued shares may note even constitute property of the estate. They seek approval pursuant to this motion “out of an abundance of caution.”

****This assumes the debtors are actually insolvent. Remember: this case basically came out of nowhere thanks to COVID and what, in form, was a margin call.

*****The process leaves a lot of latitude:

From time to time, the Company may submit orders to Jefferies relating to the shares of common stock to be sold through Jefferies, which orders may specify any price, time or size limitations relating to any particular sale. The Company may instruct Jefferies not to sell shares of common stock if the sales cannot be effected at or above a price designated by the Company in any such instruction. The Company or Jefferies may suspend the offering of shares of common stock by notifying the other party.