Hertz Global Holdings, facing a huge pile of debt payments and big bills to upgrade its fleet, is getting the bond market's version of sticker shock.

Refinancing costs are surging after more than a quarter of the car-rental company's market value was obliterated in one week and a gauge of its credit risk jumped to the highest since the financial crisis. Those rising costs could effectively shut Hertz out of the unsecured bond market it has relied on for years to replenish cash and purchase cars. With interest expenses already topping half a billion dollars a year, Hertz may have to pledge more of its assets to creditors to keep those costs from going even higher.

Some of Hertz's bonds are the year's worst performers in Bank of America Merrill Lynch's high-yield services index, with yields hovering near 9%. The junk-rated company needs extra cash to upgrade cars and technology, but it would have to pay hefty premiums — yields of perhaps 10.5% — to get investors to buy any more unsecured debt, said John McClain, a portfolio manager at Diamond Hill Capital Management. At these levels, creditors have to evaluate the company as if they might own it someday, McClain said.

“Effectively we're the equity in the business right now,” said McClain, who doesn't currently hold any Hertz bonds. “Getting 9% to be the equity doesn't feel like a great trade-off, particularly with an unproven management team with a bad starting hand.”

New Boss

Chief executive Kathryn Marinello took control in January as the third CEO in less than three years. She's trying to turn around a company that's bleeding red ink, including a second straight quarterly loss posted last week.

Selling more second-lien or asset-backed securities will allow Hertz to pay a fraction of the interest it'd pay on unsecured junk debt, since it means pledging specific assets as collateral. But it risks alienating unsecured bondholders, who will be pushed further back in line to get paid if the company defaults, making them wary of new purchases.

“The bondholders could be in a worse and worse position,” said Joel Levington, a Bloomberg Intelligence analyst. “It makes it tough to go to the bond market and issue new debt.”

There are already warning signs. The cost for an investor to protect $10 million of Hertz debt against losses using credit-default swaps jumped Friday to almost $2 million upfront, according to data provider CMA. That's more than double the price of similar contracts tied to rival Avis Budget Group Inc, and means investors see a 62% chance of Hertz failing to make good on its obligations in the next five years. The stock is down more than 50% this year, closing Friday at $10.51 in New York, valuing Hertz at less than $880 million. Billionaire Carl Icahn holds a stake of about 35%.

Marinello, 60, is a former director at General Motors. She's upgrading Hertz's fleet by buying sports utility vehicles it can rent out at higher prices and getting rid of unpopular small sedans.

“The mix of their fleet was not right,” said Mike Kelley, head of global high-yield research at Invesco Ltd, which holds Hertz debt. “They had too much on the compact side.”

But Marinello's plan is becoming more expensive amid a glut of used cars that's depressing prices. The lower value cuts how much Hertz gets for old vehicles it sells and also drives up the cost of new leases, whose pricing rises if the leasing company assumes the car will be worth less when the contract ends.

Karen Drake, a spokeswoman for Hertz, declined to comment.

Lower resale values may also weigh on Hertz's ability to pay some of its debt, according to Moody's Investors Service. Hertz doesn't own its entire fleet of cars outright. Instead, it holds most of the vehicles in a subsidiary and leases them back. The subsidiary sells investors securities backed by some of the lease payments.

Hertz's deteriorating credit quality means it's more likely to default on its lease payments, Moody's analysts wrote in a note Tuesday. The company's $3.2 billion of asset-backed bonds can keep their investment-grade ranks for now, since there's still a high chance that Hertz would keep paying even in a bankruptcy, the analysts said. That's because without the cars, the company couldn't operate at all.

Hertz carries twice the leverage of Avis, Morgan Stanley analyst Adam Jonas said in a May 11 report. To get more breathing room, Hertz persuaded lenders to amend the terms of its loans, the only company Jonas follows that's taken this step. The company still has ample liquidity, including $785 million in cash and a $1.7 billion credit line, according to Moody's, and Hertz could avoid going to debt markets until after the third quarter, Kelley said.

Nevertheless, the second quarter will also be difficult and Hertz may need to renegotiate debt agreements a second time, Citigroup Inc. analysts Manish Somaiya and Sesha Kadakia said in a May 9 note. While that's doable, the analysts wrote, investors may decide to “wait for a much better set of company fundamentals to make it an investable proposition.”

They could be waiting awhile. In April, daily rental car rates fell $1.87 to $44.26 a day, according to Rental Car News, and Hertz said last week that used-car prices will fall faster than it had budgeted earlier this year.

“It comes down to how bad the second quarter is,” Levington said. “It's tenuous.”

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Hertz's Credit Rating Puts Dent in Turnaround Plan

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