Ultra low-cost carrier Spirit Airlines filed for protection under Chapter 11 of the US Bankruptcy Code today in the Southern District of New York, which didn't surprise too many professionals who follow the company which had been unprofitable for years following the COVID-19 pandemic.
As the filing indicates, a supermajority of Spirits convertible bondholders are sponsoring the plan by making a commitment for $350 million in equity, $300 million in a loan, and swapping an estimated $800 million of bonds for equity in the reorganized company. The documents filed with the court contemplate an exit from bankruptcy protection in March 2025.
The problem is that the plan filed appears to ignore the fundamental issue with Spirit; it's not low cost, only low-priced, which is why they've proven unable to produce free cash flow. This fundamental disconnect with reality calls the plan's feasibility into question and makes one question the motivations of the plan sponsors. What will stop the new equity holders from turning around and selling the company to JetBlue or another viable suitor, assuming the incoming administration will be more likely to support consolidation than the outgoing administration, and potentially score a windfall? Will the court approve the plan if future viability is in question? How big of a fight will existing shareholders put up? This should make for an interesting and entertaining process.
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