Description

Summary

Spirit airlines has $3.4 billion of debt outstanding. We recommend buying the 2015 and 2017 Series EETCs at 87-91c or the 2026 converts which are trading at 40c. In a possible liquidation, the EETCs are likely to recover par. If there is a takeout of the airline which would increase the chances of going concern survival, the converts could be paid in full via conversion into stock (with an increased conversion rate) or cash which could make them a more interesting option on a merger getting the DOJ nod versus the senior secured bonds that are trading at 72.   

Jet Blue and Frontier Offers

Both Jet Blue and Frontier viewed Spirit as a means to acquire available seat miles given current backlogs and would create the 5^th largest US airline behind American, Delta, Southwest and United. 

Jet Blue offered Spirit an all cash consideration of $33.50 per share including a pre-payment of $2.50 per share in cash upon shareholder approval of the transaction and a ticking fee of $0.10 per month up to $0.65 starting in January 2023 through closing which equated to a fully diluted equity value of $3.8 billion and an enterprise value of $7.6 billion with estimated net annual synergies of $600-700 million.

Comparatively, Frontier offered $2.13 in cash and 1.9126 shares of Frontier stock or approximately  $25.83 per share  based on Frontier’s stock price in February 2022 which valued Spirit at $7.6 billion in enterprise value.   

In March 2023, the DOJ filed to block the JetBlue merger. A trial was held in late 2023 and the DC granted an injunction on January 16, 2024. Spirit and Jet Blue filed a notice to appeal the district court’s decision and were granted their request for an expedited schedule to hear the motion from the Court of Appeals on February 2, 2024 with arguments expected to be heard in June 2024.  

Spirit’s market cap has tumbled since the original agreement with JetBlue. If the deal doesn't close due to antitrust reasons, JetBlue will pay Spirit a reverse break-up fee of $70 million and pay Spirit shareholders $400 million ($4.30 per share) inclusive of the prepayment and the ticking fees ($250 million without).

Current Fleet

As of December 31, 2023, Spirit’s fleet consisted of  205 aircraft including: 19 A319 ceos, 64 A320 ceos, 84 A320 neos, 30 A321 ceos and 8 A321 neos, and the average age of the fleet was 6.6 years.

Of these, 117 are financed under operating leases with lease expirations in 2025-2041. The Company owns 73 aircraft of which 17 are unencumbered as of December 31, 2023. Additionally, there are 15 aircraft that would be deemed finance leases resulting in failed sale/leaseback transactions.

The company has 6 spare engines financed under operating leases with lease expirations in 2024-2033 and owned 28 of which 4 were unencumbered and 24 are pledged as collateral under the revolver maturing in 2025.

Capital Structure Overview

At September 30, 2023, Spirit Airlines had approximately $3.4 billion of debt outstanding and is highly levered with a net debt / EBITDAR of >11x at face and ¬8x based on current market prices. Despite $1.4 billion in liquidity, Spirit Airlines will likely need to be acquired in order to continue as a going concern given near term debt maturities ($1.1 billion of 2025 bonds maturing in September 2025) and limited refinancing options coupled with continued operating losses.

If the JetBlue appeal is unsuccessful, Spirit will receive an additional $300m from break up and termination fees.

EETCs

The EETCs maturing in 2028-2030 which are trading at 87-91, look to be well covered in a potential restructuring scenario given the high collateral coverage and the legal remedies offered under Section 1110 of the Bankruptcy Code which provides aircraft creditors with the ability to either  (i) repossess the aircraft collateral 60 days following the filing (despite the automatic stay provisions) or (ii) require that the airline provide the aircraft creditors.

The 2017 Series EETCs are secured by a first priority security interest in 12 new delivery aircrafts – 7 2017-2018 vintage Airbus A320-200s and 5 2018 vintage Airbus A321-200s which were delivered in 2017 and 2018. Based on current lease rates of $300k per month and an assumed cap rate of 8% these would be worth approximately $45 million each  or $540 million for the collateral pool which would cover the A tranche ($230 million) by >2x.

The 2015 Series EETCs are collateralized by 15 aircraft comprised of 12 2016-2017 vintage A321s and  3 2016 vintage A320s. Applying a similar value of $45 million per aircraft, the collateral pool would be worth $675 million against $290 million of outstanding or >2x coverage.

Assuming par recoveries based on the underlying collateral, we calculate a yield to restructuring in 2025 of 16% for the 2017 series and 12% for the 2015 series, which is an attractive risk reward in our view given the overcollateralization.

Senior Secured Notes due 2025

The Senior Secured Notes due 2025 are secured by the loyalty program but not by the aircraft. The loyalty program generated $45 million in 2023 net of marketing costs. For the portion not covered by the loyalty program, we’d assume that they would get pari treatment with other unsecured creditors.  According to Section 9.02(e) of the Indenture, reducing the principal amount or extending the maturity date of the Notes would require the consent of Noteholders holding at least 50% of the outstanding principal he amount of the notes. While there is some unencumbered collateral which could be pledged to effectuate an exchange for the senior secureds, an exchange offer may not be successful given that holders would opt to hold out.

Convertible Notes due 2025 and 2026

Spirit Airlines has $25 million of convertible notes due 2025 (issued in 2020) and $500 million of convertible notes due 2026 outstanding (issued in 2021) which are trading at 85 and 42, respectively.

The current conversion rates for the 2025 and 2026 convertible notes are 94.9262 and 24.6649 shares of voting common stock per $1,000 principal amount of convertible notes which implies a break-even conversion price of $10.53 for the 2025s and $40.54 for the 2026s (both are out of the money).

For both, noteholders may convert their notes into cash, stock, or a combination of cash and stock if the share price exceeds 130% of the conversion price for 20 consecutive trading days or if the notes are trading less than 98% of the stock price times the conversion rate (which would be 62c for the 2025s and 16c for the 2026s at the current share price of $6.52).  Based on the JetBlue merger agreement, the converts would be settled in shares of company stock.

The 2026 converts contain a fundamental change provision whereby if the company is acquired for less than 90% of stock or if Spirit shareholders retain less than 50% of control, bondholders can put bonds back at par or convert with a make whole.  The 2026 convertible notes can be amended by a majority of noteholders; however consent of each noteholder would be required to reduce the principal, extend the maturity or reduce the redemption price or fundamental change repurchase price.

Catalyst

Alternative bidder

Merger appeal

Restructuring event