Introduction
Hertz Global Holdings, a global automobile rental giant, has undergone incredible financial evolution throughout the years. Leveraging debt and equity strategically to finance expansion, ride out financial crises, and reorganize operations has been one of the most consequential components of its capital structure approach. Knowing about Hertz Global Holdings’ debt and equity choices gives us insight into important information regarding capital structure decisions that lead to corporate success and profitability. This case study examines Hertz’ finance policies and how the firm has managed to maintain its debt and equity financing mix while endeavoring to overcome financial challenges and stay competitive in the market. Knowledge on Debt and Equity Financing
General knowledge of theory concerning debt and equity financing will be necessary before examining Hertz’ finance policies.
Debt Financing
Debt financing is the utilization of credit lines, loans, or bonds to borrow capital. Companies utilize debt to finance working capital, expansion, or acquisitions in exchange for promising to repay principal and interest over a period of time.
Advantages of Debt Financing:
- Interest on debt is deductible as an expense for tax purposes, thus lowering taxable income.
- Enables firms to maintain control and ownership entirely.
- May deliver a great deal of capital to growth projects.
Disadvantages of Debt Financing:
- High debt creates financial risk and bankruptcy risk.
- Fixed interest payment can put a strain on cash flows, particularly in bad times.
- Lenders can impose restrictive covenants to restrict company freedom.
Equity Financing
Equity financing is the mobilization of funds by issuing company shares to investors in exchange for equity shares.
Advantages of Equity Financing:
- No financial burden to repay funds, less financial load.
- Appeals to investors with strategic know-how and networking contacts.
- Flexible capital structure with no need to pay interest.
Drawbacks of Financing with Equity:
- Reduces near-term control and ownership.
- May require distribution of income in the form of dividends or boost in stocks.
- Could be a longer and more costly way to raise capital.
Hertz Global Holdings’ Finance Strategies
Both debt and equity financing have been utilized by Hertz Global Holdings throughout its history, switching and replacing with capital structure alternatives based on financial situations and company needs.
Relying Too Much on Debt
Historically, Hertz has been very reliant on debt capital to expand the business. Hertz sold bonds and negotiated credit facilities in a bid to raise capital to purchase fleets and expand its international businesses. This heavy reliance on debt, however, resulted in distress when the travel sector slowed down.
When it went bankrupt in 2020, Hertz’s debt was already over $19 billion. The dip in demand from the pandemic slowed rentals sharply, and the company was struggling to service its debt. The debacle reminded everyone of the dangers of reliance on too much debt.
Equity Restructuring and Rebuilding
To come out of bankruptcy, Hertz reorganized its financial strategy through the utilization of equity capital. Hertz floated new shares, which were subscribed by large investors like Knighthead Capital and Certares Management. The availability of equity capital helped Hertz stabilize operations, alleviate debt burdens, and prepare for growth.
Among the most profound equity-based measures were a stock issue of $1.3 billion, and this assisted in raising capital without swelling the debt burden. Through equity financing, the company was cushioned to approach the financial market with increased financial strength.
Financial Strategies’ Impact on Performance
Hertz’s debt and equity financing measures have been miraculous in their impact on the company’s financial makeup and market position.
Balancing Debt for Fleet Management
Hertz uses debt strategically to acquire and keep its automobile fleet. The car rental business is a highly capital-intensive one, and debt financing is needed in order to have a competitive and current fleet. Following the bankruptcy, though, Hertz has maintained its debt levels balanced for sustainable operation but not leveraged.
Equity Investment for Growth and Innovation
With fresh equity capital, Hertz has initiated technology-driven business segments, such as electric vehicle rentals. The company’s equity-funded EV growth strategy makes the company an innovation leader in the rental industry. The strategy has also created the brand accountable, eco-friendly investors and customers, which increased the popularity of the brand.
Lessons from Hertz’s Capital Structure Decisions
There are minimal lessons that must be learned and demonstrated in the capital structure decisions of Hertz:
Equity and debt balance: There needs to be the optimal balance between debt and equity to provide financial stability. An over-reliance on excessive debt would pose financial stress, while too early issuances of equity would cause dilution in control.
Adjustment Financial Policies: The firms have to become flexible in managing capital structure as a variable of fluctuating business or market requirements.
Risk Management in Financing: Risk analysis and contingency planning should be executed properly while employing debt so that liquidity crises are not encountered in case of slowdown in the economy.
Conclusion
Hertz Global Holdings’ debt and equity policy is a best example of how business success is influenced by capital structure choices. By viewing Hertz’s previous history of excessive debt reliance and its transition to equity financing in order to restructure, companies can meet financial uncertainty more strongly. Healthy financial policy involves a marvellous balancing course of action in consonance with long-term objectives to warrant resilience and growth in the face of the ever-evolving economic environment.
For more corporate finance guidance and case studies, go to WebVersehub, your business trends and financial analysis portal.