A few weeks ago, a quarter of Avis' capital was held by short sellers. However, as nearly 2/3 of the equity remained in the hands of two hedge funds, SRS and Pentwater, the short interest reached nearly 90% of its float.
This setup gave Pentwater a formidable idea: the fund sold a large number of "in the money" put options with a one-month expiry date. Bought en masse, these suddenly triggered a surge in demand for the underlying shares, forcing short sellers to cover their positions precipitously at any price.
The mechanics worked perfectly, although this was only half of the plan, designed to line the pockets of the two hedge funds. The other half, this time in the interest of Avis, involved launching a capital increase and offering five million shares for sale - representing 15% of the current total - while the stock price was hitting new highs.
This masterclass in financial engineering and market manipulation comes at just the right time for the group, which is burdened by $28bn in net debt, negative equity and an interest expense that, since rates have increased, has been cannibalizing all - and then some - of its operating profit.
Including asset impairments, and despite an $800m tax benefit, Avis has posted $3bn in cumulative losses over the last two fiscal years. This has put serious pressure on its liquidity-starved balance sheet; a refinancing was therefore required as soon as possible.
This spectacular rabbit pulled out of a hat aside, the car rental firm is also a textbook example of the distortions caused by the pandemic. Its operating profit indeed quadrupled during the initial reopenings, even as growth remained nowhere to be found.
At this rate, the group only needs to pivot into artificial intelligence for the rally to continue.
