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American low-cost airline Spirit Airlines is offering discounted fares to college students heading to Miami during spring break. Its financial woes could create a prime upgrade opportunity for Wall Street vultures.
Spirit on Monday it formally announced its anticipated Chapter 11 bankruptcy filing. Its shareholders will disappear while creditors will exchange much of their debt positions for new shares in a reorganized spirit. Two years ago, rival JetBlue had offered to buy Spirit for a total enterprise value of $7.6 billion, before regulators blocked that deal.
Spirit has not yet shared what the value of its reorganized company will be, but expects a figure between $3 billion and $4 billion. The figure is modest enough that hedge funds and bond managers are willing to invest several hundred million dollars in new capital to get the new Spirit off the ground.
Since the JetBlue transaction fell through, Spirit has been burdened by intense competition for value travelers, operational challenges related to an engine supplier and looming debt maturities that it could not easily refinance.
In many ways, Spirit’s bankruptcy process is bloodless. Suppliers and counterparties of aircraft leases worth $1.5 billion will not be affected. Spirit is also not altering existing flights and operations. Holders of senior notes and convertible bonds will exchange $1.6 billion in paper for new paper worth about half as much.
Additionally, some of those bondholders will invest $350 million in equity, likely at a discount to fair value. Add to that several fees and a $300 million bankruptcy loan, and the various cookies that have been negotiated are likely to prove lucrative.
Who will occupy the middle seat next to the bathroom on this flight? The valuation cut on the senior and convertible bonds will be unpleasant for any buyer who bought at par, even if they participate in the share offering. And then there are Spirit’s public shareholders who will be eliminated.
In the JetBlue transaction, shareholders would receive almost $4 billion. In theory, it is possible for shareholders to challenge the bankruptcy deal announced Monday if they can come up with their own financing plan. But you better hurry: the gate is about to close.