Recently the Hertz rental car agency filed for Chapter 11 bankruptcy protection. The company was unable to meet their $11 billion financial agreement to their secured lenders. In addition, the company listed more than 100,000 creditors that they owed money to.
Hertz was a $25 billion company that was highly leveraged. It was dependent on operating revenue to service its debt and maintain the business; with the recent dramatic drop-off in travel due to COVID-19, Hertz went rapidly into decline.
Corporate bankruptcies are not unusual. Typically, when a company gets into serious trouble with no visible path toward solvency, they either file for a Chapter 7 or Chapter 11 bankruptcy. Chapter 7 bankruptcy liquidates the company’s assets, while Chapter 11 allows the business to continue to operate under a reorganization plan.
But let’s look closely at the case with Hertz. A few days prior to filing for bankruptcy protection, the Hertz company paid out more than $16 million in bonuses to senior managers, including their new chief executive (according to the Wall Street Journal, May 27, 2020). And Hertz is not the only company to pay out bonuses just before filing for bankruptcy protection. J.C. Penny paid out $10 million to top executives just before filing. Chesapeake Energy paid out $25 million to senior executives. These companies refer to these bonuses as retention bonuses. I guess that allows them to justify the payments while their creditors are left on the sidelines hoping to get paid.
The law doesn’t allow companies to pay out such bonuses after they file for bankruptcy, and by doing so prior to filing, they are essentially evading the law. Companies who participate in these tactics state that they need to do so to keep top executives from jumping ship.
My contention is that the creditors who worked with these companies in good faith that they would get paid are getting the short end of the stick. Many of these companies are small to mid-market companies that cannot afford to take such a hit, getting pennies on the dollar while the executives reap big bonuses. If a business is unable to pay its creditors in a timely manner and is in such financial trouble that they need to file bankruptcy, then they shouldn’t be paying out large bonuses to their executives. This is not much different from the federal government bailing out the auto industry during the recession and the auto manufacturers turning around and paying their executives large bonuses for their less than stellar performance.
I am interested in what you think about this topic. Write me and let me know your thoughts: garyfurr@garyfurrconsulting.com
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