(Bloomberg) — Spirit Airlines bonds rose on Friday after the company told investors it is considering refinancing upcoming debt maturities. But its prices are so low that it suggests the company faces an uphill battle to avoid bankruptcy, the latest in a long line of U.S. airlines. .
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The company's 8% bond due in 2025 rose nearly 12 cents to 63.25 cents on the dollar, but the yield remains near 40%, with bondholders expressing skepticism about Spirit's future. There is. They have good reason to be cautious. With about $2.5 billion in debt and stagnant profits, the low-cost airline already enjoys no advantage in a market that is tightening the reins on riskier borrowers.
The bright spot, and potential lifeblood, for Spirit is its fleet, one of the youngest U.S. carriers that commands a premium for quality aircraft. Airlines have had success using their aircraft and spare parts to raise funds, and Spirit began doing so in December with a series of sale-leaseback deals for its aircraft.
Officials are rushing to decide on Spirit Airlines' future path after JetBlue Airways' $3.8 billion bid to buy the airline was rejected by a federal antitrust ruling on Tuesday. The remaining financing options can require a great deal of creativity. Both airlines appealed the ruling on Friday in a last-ditch effort to save their contracts.
Representatives for Spirit did not comment Friday on the company's financial outlook. In a statement Thursday, the company said it was “not pursuing or engaging in any statutory restructuring” and that it has “taken, and will continue to take, prudent steps to ensure the strength of its finances and ongoing operations.” I'm going,'' he said.
high yield trading
Bond markets have been relatively relaxed in recent weeks, with borrowers looking to adjust some loan terms and even issuers rated at the lower end of the junk spectrum dealing with maturities. But Spirit is grappling with challenges stemming from lease and debt payments, as well as low profit margins.
The company has shed cash in three of the past five quarters, according to data compiled by Bloomberg. This does not bode well for the prospects for refinancing the September 2025 bond.
If the merger fails, George said, the company will receive a $70 million “break-up fee” and the maximum amount from engine maker RTX as compensation for problems that have taken some vehicles out of service. He may receive up to $500 million. Bloomberg Intelligence analyst Ferguson said: These are short-term payments and do not solve the cash burn problem.
valuable asset
Companies like Spirit rely on expensive machinery to operate and have a history of using their vehicles as collateral to borrow new cash.
Airlines may ask current bondholders to exchange them for long-term maturities backed by old or new equipment, which is often considered a distressed exchange.
As of September 30, Spirit had a fleet of 202 Airbus SE A320 aircraft. The aircraft shortage is caused by delayed deliveries from aircraft manufacturers, the temporary grounding of Boeing's Max 9, parts shortages and extended or delayed engine repairs. Number of airplanes across the industry.
The average age of Spirit's fleet is 6.4 years, according to Cirium data, making it the second youngest among a group of 13 U.S. airlines and behind rival discount retailer Frontier Group Holdings.
But for businesses facing fundamental challenges, even valuable equipment has limited appeal.
Blake Haxton, credit analyst at Brandywine Global Investment Management, said: “The funders need to be convinced first and foremost that Spirit is viable as an independent company, but I “I don't know if that's possible,” he said.
Spirit owns its own fleet, but most of the equipment has already been pledged as collateral for existing debt. Bloomberg Intelligence's Mr. Ferguson said the remaining funds are not enough to cover the financing needs.
“It's going to be very difficult,” he said. “They have to manage 2024 very carefully” and “need to minimize cash burn.”
private credit
Spirit could instead rely on the $1.6 trillion private credit market, which often provides financing for difficult times.
Doing so could encourage existing creditors to cooperate before potential capital from new investors subordinates the company's holdings and hopes of recovery are further dashed in the event of bankruptcy or liquidation. be.
“There's a huge incentive for bondholders to get in there and help Spirit through the situation,” Ferguson said.
parts sales
Ending up in bankruptcy court doesn't necessarily mean the demise of a company, but Spirit's options are if it uses Chapter 11 protection to discharge burdensome debt and re-emerge as a more functional company. limited.
Conor Cunningham, an analyst at Melius Research, said in a note that the industry's shortage of aircraft could cause lenders and banks to refuse to negotiate lower interest rates if the aircraft have a high value on the open market. said. He also said there likely won't be much room for concessions from employees, since pilot rates are 14% below Delta's rates.
Spirit could also face a “mass exodus” of employees, he added.
–With assistance from Mary Schlangenstein, Jill R. Shah, Reshmi Basu, Jeremy Hill, and Richard Clough.
(Updated paragraph 4 with information about Spirit and JetBlue appealing a federal judge's ruling blocking their planned merger.)
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