Given the drastic economic downturn in the travel and hospitality industry, car rental company Hertz Global Holdings Inc (NYSE: HTZ) was unable to come to a forbearance agreement with its senior lenders over missed lease payments in April, and as a result has filed for bankruptcy. However, prior to the the May 22 deadline by which Hertz had to come to an agreement with its lenders, which was of course not achieved, the Federal Reserve went on a shopping spree and purchased $1.8 billion worth of ETF’s which also happen to own Hertz bonds.
As a means of stimulating the function of bond markets, the Federal Reserve began buying junk bonds, or so-called fallen angels, which were downgraded to junk bond status as an implication of the coronavirus pandemic. As if that didn’t have taxpayers gasping enough, the Fed then announced it will begun buying corporate bond ETFs, allocating a total of $1.8 billion to the “cause.” However, the Fed did not discuss how much of the $1.8 billion will be used to purchase what portions of investment-grade ETFs and junk ETFs.
Although the Fed is downplaying the junk bond purchases, stating that the goal is to rather bridge the gap between the investment-grade and non-investment-grade markets, it turns out there is a little bit more to the story than that. Of the ETF’s the Federal Reserve is buying, a sizable portion of them hold junk bond components – so in other words, the Fed’s attempted sugar-coating has failed.
But here’s the real kicker that will have taxpayers fainting: two of the junk bond ETFs that the Federal Reserve purchased, HYG and JNK, each own $50 million and $30 million respectively, worth of now-defaulted Hertz bonds. So what does this all mean? Well for starters, the Federal Reserve is now technically a stakeholder in Hertz’s bankruptcy process. And unless the Federal Reserve can deprive itself of the Hertz bonds via JNK or HYG in the meantime, it will own a devalued stake in the company’s post-petition liability.
Information for this briefing was found via Market Watch and Zero Hedge. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.