Description

I recommend a speculative position in the Spirit 8% bonds due 9/20/2025 bonds.   These bonds were issued by a special purpose entity Spirit Loyalty but they’re guaranteed by Spirit Airlines, “parri passu with first priority lien.”

There are numerous market participants who simply cannot own a bond that is downgraded beyond a certain point, or faces being a part of a lengthy restructuring, as this bond faces. 

As of the most recent quarter (9/30/2023), Spirit had $929 million in cash and $300 million available on revolver.   Spirit has debt and operating leases of $6.5 billion.

Spirit has $80 million coming due in 2024 and $25 million coming due in early 2025 - both before these bonds come due.

In 2025, a total of $1.176 billion comes due, of which these bonds are included. 

 Spirit Airlines Debt Distribution

Assets:  As of the end of 2022, Spirit owned 106 Airbus A320 Airplanes

Source: Spirit Airlines 2022 SEC 10-K

A “sale-leaseback” transaction that occurred less than 2 weeks ago valued the planes at $35 million each.   Google indicates the value of a used Airbus A320 is ~$25 million and a new Airbus A320 is over $100 million.  Airbus A320s last around 25 years.  Spirit has a young fleet.

Source:  Spirit Airlines 8-K 1/3/2024

I’m taking a position in these bonds for 3 reasons:

(1) If Spirit is able to replicate the sale-leaseback transaction of January 3rd with the remaining 81 owned aircraft then they would produce $2.8 billion in cash.  That is more than enough to repay the 2025 debt.  

(2) Less than 2 years ago JetBlue, an entity that knows more about the airline business than I know, was willing to pay over $3 billion for the equity of Spirit’s business, which of course is behind the debt.  I have no idea how JetBlue was going to pay for it as their financials look terrible to me but you can’t ignore the fact that they were willing to pay it. 

(3) A credit analyst for JPMorgan did a research piece on this particular bond dated Nov. 1, 2023.  In this report he did a probability weighting of likely outcomes & recoveries if the DOJ was successful in blocking the merger.  The weighted average value is $.75 and included the probability of a restructuring.   Another useful thing this analyst discussed was all the moving parts in the airline industry.  Heck, his report was written before the recent Boeing issues.  

Risks:

This is the airline industry. 

You can see my track record buying junk:  I lose big sometimes.

In the recent sale-lease back transaction that I use as a reference, they could’ve put their newest planes in the deal.

Catalyst

40% ytm