New York Hedge Fund Has $1.1 Billion Tied Up in These 2 Stocks. It’s Not Looking Good. 

Knighthead Capital Management is a New York-based hedge fund specializing in fundamental analysis, operational and financial turnarounds, and risk management.

Co-founded by Tom Wagner and Ara Cohen in 2008, the duo has grown the firm to nearly $16 billion in assets under management, much of it out of the public market spotlight. 

For example, Knighthead Capital established Knighthead Annuity and Life Assurance Company in 2014, raising $230 million from investors. It used the funds to capture a piece of the fixed annuity market for offshore clients, an underserved segment of the global annuity business.

At the end of 2024, its annuity business celebrated its 10th anniversary. At the end of 2023, Knighthead Annuity had $5.3 billion in assets and $343 million in annual revenue. Knighthead Capital provides asset management for the subsidiary’s assets. 

As of Dec. 31, it had $2.1 billion invested in U.S.-listed securities, according to its Q4 2024 13F holdings report. Approximately $1.1 billion, or 52% of its portfolio, was invested in two travel-related stocks: Hertz Global Holdings (NASDAQ:HTZ) and Wheels Up Experience (NYSE:UP). 

Both are penny stocks. Here’s why they’ve got their work cut out for them.

Key Points About This Article:

• Knighthead Capital Management might have over $15 billion in assets under management, but its top two stocks are a real mess. 
• Hertz Global Holdings’ (NASDAQ:HTZ) story has gone from bad to good and back again. 
• The hedge fund’s other significant investment in Wheels Up Experience (NYSE:UP) involves a partnership that includes Delta Air Lines (NYSE:DAL) and Cox Enterprises, but that might not be enough to generate a reasonable return on its investment.
• Sit back and let dividends do the heavy lifting for a simple, steady path to serious wealth creation over time. Grab a free copy of “2 Legendary High-Yield Dividend Stocks” now.

Hertz Global Finds Itself in Familiar Territory

Before getting into Knighthead Capital’s current Hertz holdings, it’s essential to go back to May 22, 2020, when the company’s U.S. operations filed for Chapter 11 bankruptcy proceedings. At its filing, it had amassed over $17 billion in debt. 

So began a 13-month restructuring process that culminated with it emerging from Chapter 11 on June 30, 2021. 

Knighthead Capital, in partnership with New York private equity firms Certares Management and Apollo Global Management (NYSE:APO), injected $5.9 billion in new equity into the business, enabling Hertz to cut its debt by 80% while also obtaining a $2.8 billion exit credit facility, which included an undrawn $1.3 billion revolving credit facility, and a $7 billion asset-backed vehicle financing facility. The interest on the $7 billion was less than 2%. 

Judge Mary Walrath, who presided over the Chapter 11 proceedings, said that the outcome was better than any bankruptcy case she’d participated in in her 20+ years as a judge.

The reason WhaleWisdom.com indicates that Knighthead Capital first acquired shares in the rental car company in Q4 2021 is that it made an IPO offering of 44.52 million shares of Hertz stock in November 2021 at $29 a share, well above where the shares traded during the 13-month restructuring. 

The previous shareholders got common stock worth 3% of the reorganized business, an unusual occurrence. In most bankruptcies, the common shareholders are wiped out. 

As part of the reorganization, Apollo was issued $1.5 billion in preferred stock. CK Amarillo LP, the limited partnership set up by Knighthead Capital and Certares Management, sold 15.22 million shares in the IPO, with Hertz receiving none of the proceeds. 

CK Amarillo owned 181.46 million shares of Hertz at the end of 2021. The value of those shares as of Dec. 31, 2021, was $4.53 billion. It continued to hold the shares at the end of 2024. However, the value at the end of 2024 had fallen to $664.1 million, representing 31.59% of Knighthead Capital’s 13F assets and 59.2% of Hertz’s stock.

What Went Wrong?

Just about everything.

However, the move to electric vehicles (EVs) was likely one of the worst, as it became readily apparent that EVs didn’t fly in certain parts of the U.S.

“While the company believed it could get out ahead of the competition, the reality was that it was digging its own grave. Bloomberg goes into great detail about how an out-of-touch executive class was utterly convinced that they were ushering in an entirely new way of renting an automobile,” wrote The Truth About Cars contributor Matt Posky in November. 

“Management was positive Certares could solve Hertz software and cloud issues while likewise integrating the many travel agencies it owned into novel money making ventures.”

To make matters worse, in June 2024, Discovery Capital Management filed a complaint on behalf of warrant holders with the Delaware Chancery Court, claiming that Hertz’s repurchase of $3.4 billion of its stock and taking on $2.2 billion in debt as part of a recapitalization between November 2021 and December 2023, represented a change of control, and as such, the warrant holders were owed nearly $200 million for the redemption of their warrants.  

In February, a judge with the Delaware Chancery Court ruled that it did not qualify as a “reorganization event,” and as such, Hertz did not have to redeem the warrants. 

As a result of the EV fiasco, Hertz reported an adjusted loss of $1.46 billion in 2024, considerably worse than the $172 million profit it reported in 2023.

It’s no wonder that the 10 analysts that cover Hertz stock rate it Underweight, with a $3 price target. 

The Other Penny Stock

Knighthead Capital’s second-largest holding is Wheels Up Experience, a provider of a subscription private jet membership and private jet charters. The hedge fund owns 258.17 million shares of Wheels Up’s stock, accounting for 20.26% of its portfolio and representing a 37% ownership stake. 

Wheels Up went public in the heyday of SPACs (special purpose acquisition companies) back in 2021, combining with Aspirational Consumer Lifestyle Corp., a blank-check company that raised $225 million in its IPO, to invest in “businesses with premium brands that offer an aspirational lifestyle experience to consumers, which we refer to as the aspirational lifestyle space,” stated its September 2020 prospectus. 

In 2022, Wheels Up’s first full year as a public company, it had $1.58 billion in revenue and a $384 million operating loss. Two years later, its revenues have fallen by 50% to $792.1 million, with a $249 million operating loss. It finished 2024 with an accumulated deficit of $2.1 billion. 

Knighthead Capital and Certares Management partnered with Delta Air Lines (NYSE:DAL) and Cox Enterprises in September 2023 to provide it with $500 million in credit facilities to stabilize its business. In return, the lenders received 80% of its stock. That’s on top of the 15% already held. 

Wheels Up created a 12-person board as part of the agreement, with the four partners getting nine of the 12 seats.  

Knighthead Capital and its partners will take several years to get this business turned around.

The post New York Hedge Fund Has $1.1 Billion Tied Up in These 2 Stocks. It’s Not Looking Good.  appeared first on 24/7 Wall St..