NEW YORK: Spirit Airlines Inc’s bonds got a boost after the company told investors it was looking to refinance upcoming debt maturities.
But their deeply distressed prices suggest it faces an uphill battle to avoid becoming the latest in a long line of US air carriers to go bust.
The company’s 8% notes due 2025 jumped nearly 12 US cents on the dollar to 63.25 US cents, but still yield almost 40%, signaling bondholders’ skepticism about Spirit’s future.
They have good reason to be cautious: with about US$2.5bil in debt and flagging revenue, the budget airline already enjoys no advantages in a market tightening the reins on risky borrowers.
A bright spot – and potential lifeline – for Spirit Airlines is its fleet, which is one of the youngest among US carriers when there’s a premium on good planes.
Airlines have had luck raising money using their fleet and even spare parts, which Spirit Airlines began doing in December in a series of sale-leaseback deals on its planes.
After a federal antitrust ruling last Tuesday scuttled JetBlue Airways Corp’s proposed US$3.8bil acquisition of Spirit Airlines, stakeholders are rushing to determine the latter’s path forward.
Its remaining financing options may require a heavy dose of creativity.
Both airlines appealed the ruling last Friday in a last-ditch effort to save the deal.
Representatives for Spirit Airlines didn’t provide a comment Friday on the company’s financial prospects.
In statements last Thursday, the company said it was “not pursuing nor involved in a statutory restructuring,” and that it “has been taking, and will continue to take, prudent steps to ensure the strength” of its finances and ongoing operations.
Debt markets have been relatively accommodating in recent weeks, with borrowers looking to tweak some of the terms of their loans and even issuers rated at the lower end of the junk spectrum addressing their maturities.
Spirit Airlines, however, is contending with challenges stemming from its slim margins combined with payments on leases and debt.
The company has bled cash in three of the past five quarters, according to data compiled by Bloomberg. That doesn’t bode well for its refinancing prospects on notes due in September 2025.
It’s set to receive US$70mil via a “break-up fee” if the merger fails to go through and could also see as much as US$500mil from engine maker RTX Corp to compensate it for problems that have grounded some of its fleet, according to George Ferguson, a Bloomberg Intelligence analyst.
These are short-term payments and don’t solve the issue of cash burn.
Companies like Spirit Airlines, which rely on expensive machinery in order to operate, have a history of using their fleet as collateral to borrow fresh cash.
The airline could ask current bondholders to swap their notes for longer-dated maturities backed by new or better equipment, in what’s often deemed a distressed exchange.
Spirit Airlines had a fleet of 202 Airbus SE A320-family aircraft, as of Sept 30.
Delivery delays from aircraft manufacturers, the temporary grounding of Boeing Co’s Max 9, parts shortages and lengthy or delayed engine repairs have resulted in a shortage of planes across the industry. — Bloomberg
