Hertz Could Pursue Drop-Down Transaction to Fill Potential Liquidity Need; Term Lenders Could Be Excluded Because of Credit Agreement Flexibility

Credit Research: Krishan Sutharshana, CFA Legal Analyst: Julian Bulaon   Key Takeaways   We believe that Hertz may, similar to last year, need to raise new money to fund seasonal cash burn amid its fleet refresh program. Given where the first lien bonds are currently trading, we believe the new money could be raised through the drop-down of certain assets into a nonguarantor subsidiary.   Because of flexibility under its credit agreement and a lack of flexibility under its secured notes indentures, we believe there is a the potential for a transaction in which first lien and second lien noteholders get the option to provide new money and exchange into new debt issued by a new subsidiary at par, potentially with a guarantee from Hertz, while term lenders could be excluded.   We assume that RCF lenders and holders of 4.625% unsecured notes would be offered the opportunity to participate in a deal, as they have the next corporate debt maturities, in June 2026 and December 2026, respectively. Amid its fleet refresh program and operational turnaround efforts, we believe Hertz may need to return to the capital markets for the second consecutive year to fund cash burn during its seasonal[...]