Spirit Airlines bankruptcy gives priority boarding to opportunistic creditors

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US budget carrier Spirit Airlines serves up discounted fares to college kids going to Miami for spring break. Its financial problems could create a first-class upgrade opportunity for Wall Street vultures.

Spirit on Monday formally announced its anticipated Chapter 11 bankruptcy filing. Its shareholders will be wiped out while creditors will swap much of their debt positions for new equity in a reorganised Spirit. Two years ago, rival JetBlue had offered to buy Spirit at a total enterprise value of $7.6bn, before regulatory authorities blocked that deal. 

Spirit has not yet shared what its reorganised enterprise value will be but expect a figure between $3bn and $4bn. The number is modest enough that hedge funds and bond managers are willing to invest several hundred million dollars of fresh equity to get the new Spirit off the ground.

Since the JetBlue transaction fell away, Spirit has been weighed down by intense competition for value flyers, operational challenges related to an engine supplier and looming debt maturities it could not readily refinance.

In many ways, the Spirit bankruptcy process is bloodless. Vendors as well as counterparties on $1.5bn of aircraft leases will not be affected. Nor is Spirit altering existing flights and operations. Holders of senior bonds and convertible bonds will swap $1.6bn of paper for new paper worth about half that.

Additionally, some of those bondholders will invest $350mn of equity, probably at a discount to fair value. Add in various fees and a $300mn bankruptcy loan, and the various cookies that have been negotiated are likely to prove lucrative. 

Who is getting the middle seat adjacent to the lavatory on this flight? The haircut on the senior and convertible bonds will be unpleasant for any buyers who bought at par, even if they participate in the equity offering. And then there are the public shareholders of Spirit who are set to get zeroed out.

In the JetBlue transaction, stockholders were to receive almost $4bn. It is theoretically possible for shareholders to challenge the bankruptcy settlement that was announced on Monday if they can come up with their own financing plan. But they had better be quick: the boarding door is about to close.

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