AirTran tacks on add'l $140M to cash

[Ty Webb]

Funniest Post of the Week!

Dude, that's the second time in a week or so where you've posted something along those lines. Your fantasies are, to put it nicely, disturbing. Your screen name's bigmeat; it doesn't take much to figure out which person you are in those fantasies. I take it you shop at WalMart and live in a trailer.

And THAT pretty much sums it up!

Although I suspect you are right about Big Meat, I hope you are overly pessimistic about the situation at AirTran . . . I guess we'll see what happens with the stock, but Most of us care a lot more about our liquidity than the stock price . . . . . in the near term.

TW

 

[lowecur]

Sorry, this looks like classic (to a 'T') death spiral financing. Classic? I thought death spiral has no floor on the stock price, thus allowing the holders to short it down to $0 to gain more shares? The conversion rate on the bond is 260.4167 shares per $1000 principal. That converts to $3.84/sh, give or take. This allows the owners of the bonds to short AAI stock and be able to convert the bonds to stock at $3.84/sh in order to cover their short sales. But the stock closed today @$3.61, and the increase in the conversion rate of 52.0883 has a floor of $3.20 per share and a cap of $4.00 per share (then 52.0883 shares begins to adjust downward as the stock price rises). That gives them a ceiling as to how much money is at risk for them in shorting the stock. It is in their best interest to keep the price between $3.20 - $4.00, but does it make much sense to hold the stock price down when their stock price value is also going up?
Also, note that the conversion rate is adjustable. I haven't dug through the supplemental indenture to see how the conversion ratio changes, but I can almost guarantee you that the adjustment rate is in the favor of the bondholders. There should
The bonds are likely to be bought by hedge funds who are going to short the fukc out of AAI. Such nasty language.

I'm going to have to spend some time this weekend pulling apart the 8-K, but it is very bad news for stockholders. Mmmmmm! So, AirTran had about 92M shares prior to the offering, and now has about 112M with the common stock sale & a max of 135M if and when the Preferred is converted. It's dilution, but has the intrinsic value of the stock increased? For now it's my opinion, yes. But there's a caveat....and that's the economy and the shorts that jump on board in the next year or two. They have to weigh the short against how well AAI will do when capitulation hits....if it hits.

As for AAI, I still think that this was a smart move; they need the cash to stay out of chap 11. It will either keep them out of chap 11, with a stock price of near zero, or it will be their last drink at the well of financing prior to chap 11. The door to raising additional capital for AAI just closed with this bond offering.

As for Neidl's comments on the airline industry, I can't say that I totally disagree with him. He's been around for quite a while and knows what he's talking about. I ignore any upgrades/downgrades from Wall Street because they're for suckers; you've got to do your own research. When I shorted the piss out of Northwest prior to their chap 11, it seemed like everyone and their brother upgraded the stock all the way to the bitter end. It cost me a bit, but I ended up making out very well in the end.

You sound like a smart guy, and I would guess you will short this stock. Like I said, I'm dumber than a bucket of rocks on preferred financing and I'm sure you'll point that out to me. But hell, that's how we learn.

imp:​

 

[UALX727]

I listened to the conference call a few times on the Airtran website. I would highly suggest it for anyone interested in AirTran, especially the question/answer section. It is located in the investor relations section.

I must say that I believe we are in good hands with Bob Fornaro at the helm. It sounds like he is making the right moves to assure that AirTran will be along for the long-haul.

I, for one, am sick of jumping from airline to airline for employment.

 

[GogglesPisano]

Wow, a pilot for United giving AirTran @*#$.. Just when you think you have seen it all. Might want to check on your own house. Didn't CAL just look at your books and say no F#@$ing way in hell.

Andy is a realist, unlike most guys on Flight(my airline can beat up your airline)info. He holds no punches on any airline's future -- including his own.

 

[PCL_128]

Andy is a realist, unlike most guys on Flight(my airline can beat up your airline)info. He holds no punches on any airline's future -- including his own.

Andy isn't a realist, he's an extreme pessimist. He sees armageddon around every corner. I'm not too concerned. We're in good hands with Bob at the helm, and I think we're perfectly positioned now to take advantage of any available assets that result from consolidation.

 

[Andy]

Quick and dirty; haven't had time to dig deeply.

AAI raised $140.3M. $12.3M of that is untouchable; it is held in escrow to pay the first 6 interest payments on the bonds. This is a particularly nasty aspect; I can go into detail if anyone cares.
Net proceeds to AAI is $128M.

AAI sold $74.8M of convertible senior bonds and 24,659,375 shares of common stock at $3.20/share. The underwriters took almost $13.5M in fees.

There were 3,346,875 shares of common stock available for overallotment at $3.20/sh, but as of 2 May, 1 million of those shares have not been bought. That ain't a good omen for the stock price.

I'm still working on figuring out the collars to trigger different conversion rates; they've got a very complex formula. I doubt that it will go in the favor of AAI's shareholders.

I don't know if there's a lockup period on selling the new stock; most likely not. The holders won't dump it immediately; they'll distribute over time. Massive shareholder dilution; this is an increase on the order of 25% in the number of shares of stock.

The convertible bonds are senior unsecured notes, which, if AAI were to declare bankruptcy, would put them at the top of the pecking order behind secured debt. There are probably several control clauses in the underwriting giving the bondholders significant control over AAI if it were to declare chap 11.

Not pretty, but liquidity's the important thing here.

 

[Andy]

You sound like a smart guy, and I would guess you will short this stock. Like I said, I'm dumber than a bucket of rocks on preferred financing and I'm sure you'll point that out to me. But hell, that's how we learn

Most of my capital's tied up on other plays. If I were to short AAI, I'd be cautious. At this price level, Wall Street can play a lot of manipulative games.
The stock will go down; likely significantly. While $3.20 looks like a floor, it's not. It's a temporary stop on the way down.
You could conservatively short the stock here to $3.25 for a fairly quick profit; just don't use leverage. The market makers have a way of running stocks up and down.

If you've got any questions on my notes, fire away.

 

[lowecur]

I'm still working on figuring out the collars to trigger different conversion rates; they've got a very complex formula. I doubt that it will go in the favor of AAI's shareholders. So let me know if you consider this "classic" death spiral financing? It just doesn't seem quite as toxic as you make out. Dilution is a necessary evil of preferred financing, or new stock issuance. Many of the largest corps have preferred's you can buy, and it's one of the best ways to finance when credit is tight.

I don't know if there's a lockup period on selling the new stock; most likely not. I think I read 90 days. The holders won't dump it immediately; they'll distribute over time. Massive shareholder dilution; this is an increase on the order of 25% in the number of shares of stock.

The convertible bonds are senior unsecured notes, which, if AAI were to declare bankruptcy, would put them at the top of the pecking order behind secured debt. There are probably several control clauses in the underwriting giving the bondholders significant control over AAI if it were to declare chap 11. We don't know that yet, but I'm sure some of the questions you are raising will be brought up by the union to mgt for answers. Can't wait to hear what mgt says or what union consultants have to say.

Not pretty, but liquidity's the important thing here.

I'm sure Fornaro would tell you today that AAI should have leveraged the company more in the last few yrs to protect the company from this scenerio. It is what it is, and they have bought themselves some time to see what developes in this crazy business in the next 24 months.

imp:​

 

[Andy]

Lowecur, Section 4.03(c) outlines the actual conversion rate of the bond - for every $1000, 260.4167 shares plus the amount of shares from exhibit B in the Supplemental Indenture.
For example, the chart shows for a bond redemption in the 30 April 2008 period, if the closing price of the stock over the last 30 trading days was $4.00/share, the additional shares per $1000 would be 52.0833 shares. In other words, if the average stock price was $4/sh over the last 30 trading days, a bondholder could convert his $1000 bond for 260.4167 + 52.0833 = 312.5 shares. ($3.20/sh)
If the stock price averaged $10/share over the same lookback period, the bondholder could convert for 260.4167 + 14.4510 = 274.8677 shares. ($3.64/sh)

Section 4.06 merely adjusts the conversion rate in case the company decides to issue additional stock. Pretty standard way to protect the convertible bondholder from further dilution.

Section 4.11 allows the company to further increase the conversion rate. The company would want to do this if they did not want to pay the accrued interest on the bonds.

I was particularly impressed with the clause that forces AAI to escrow the first 3 years' interest on the bonds. That money's untouchable by AAI and it represents nearly 20% of the net proceeds of the bond offering. This is particularly advantageous for the bondholder, because even if AAI declared bankruptcy a week later, the bonds would still get the semiannual interest payments while continuing to maintain a senior position among unsecured debt.

I tried to make the above in as plain english as possible, but the subject isn't easily translated from business gobblygook.

To give you a comparison of another airline's convertible bond offering, I pulled up a Continental filing from early 2002. http://www.sec.gov/Archives/edgar/data/319687/000095012902000247/0000950129-02-000247.txt
Note that the conversion price is $40/share. The high for the year was $35.25/sh. The only adjustment to the conversion rate is the same as outlined in Section 4.06 of AAI's convertible offering.

Yes, this is definitely death spiral financing. It doesn't kill the company, just the stock price. This is not a company that you want to buy stock in.

 

[Andy]

Andy isn't a realist, he's an extreme pessimist. He sees armageddon around every corner. I'm not too concerned. We're in good hands with Bob at the helm, and I think we're perfectly positioned now to take advantage of any available assets that result from consolidation.

I warned of an economic slowdown more than 6 months ago. It's happening.
I have said that airlines need to trim capacity and preserve cash in order to survive this down cycle. Your airline's now getting with the program and will show no more than zero growth through 2009 and has added $128M in liquidity.
Any airline, save Southwest, which is taking delivery of aircraft in this environment is cutting their throats. They might as well flush liquidity down the toilet.
Your company is making the right moves in this environment; they're just not the moves that you'd like them to make. Furloughs at all airlines (except Southwest) will be necessary for them to survive this downturn. I don't like the message any more than anyone else on this board, but that's the economic environment.

Your Pollyanish analysis of the current financial environment does not make me an extreme pessimist. It merely tells me that you are blissfully ignorant of what's lurking below the surface in the credit markets.

 

[jehtplane]

Furloughs at all airlines (except Southwest) will be necessary for them to survive this downturn. .

quote]



That is way extreme, not every airline is going to have to furlough pilots, a few might but certainly not every airline, go take a happy pill.

 

[Andy]

That is way extreme, not every airline is going to have to furlough pilots, a few might but certainly not every airline, go take a happy pill.

Not every single airline, but it will be few and far between as far as those not furloughing. When aircraft get parked and there are no retirements, the end result is furloughs. Difficult concept to grasp, eh?

 

[lowecur]

Lowecur, Section 4.03(c) outlines the actual conversion rate of the bond - for every $1000, 260.4167 shares plus the amount of shares from exhibit B in the Supplemental Indenture.
For example, the chart shows for a bond redemption in the 30 April 2008 period, if the closing price of the stock over the last 30 trading days was $4.00/share, the additional shares per $1000 would be 52.0833 shares. In other words, if the average stock price was $4/sh over the last 30 trading days, a bondholder could convert his $1000 bond for 260.4167 + 52.0833 = 312.5 shares. ($3.20/sh)
If the stock price averaged $10/share over the same lookback period, the bondholder could convert for 260.4167 + 14.4510 = 274.8677 shares. ($3.64/sh)

Section 4.06 merely adjusts the conversion rate in case the company decides to issue additional stock. Pretty standard way to protect the convertible bondholder from further dilution.

Section 4.11 allows the company to further increase the conversion rate. The company would want to do this if they did not want to pay the accrued interest on the bonds.

I was particularly impressed with the clause that forces AAI to escrow the first 3 years' interest on the bonds. That money's untouchable by AAI and it represents nearly 20% of the net proceeds of the bond offering. This is particularly advantageous for the bondholder, because even if AAI declared bankruptcy a week later, the bonds would still get the semiannual interest payments while continuing to maintain a senior position among unsecured debt.

I tried to make the above in as plain english as possible, but the subject isn't easily translated from business gobblygook.

To give you a comparison of another airline's convertible bond offering, I pulled up a Continental filing from early 2002. http://www.sec.gov/Archives/edgar/data/319687/000095012902000247/0000950129-02-000247.txt
Note that the conversion price is $40/share. The high for the year was $35.25/sh. The only adjustment to the conversion rate is the same as outlined in Section 4.06 of AAI's convertible offering.

Yes, this is definitely death spiral financing. It doesn't kill the company, just the stock price. This is not a company that you want to buy stock in.

Thanks for your research.

I'm still not going along with "classic death spiral," just because the terms outline a floor on the conversion rate between $3.20-$4.00. That's just a difference of opinion and symantics. Could the stock get below that for other reasons? Sure, with future bad economic news, shorts have every reason in this business to be bullish.

AAI's future is tied to what form industry capitulation takes and it's inherent timing. Things could be expedited if M&A activity is approved by the end of the year. Alaska is sitting on lots of cash, and at some point the stock valuation at AAI may look enticing for M&A. It pays for them to be patient.

In any case, AAI is in much better shape than FRNT and for that matter possibly UAL (if mgt continues to stand pat w/o major capacity cuts). It's going to be an interesting ride with the industry as surviving companies and their employees will be the major benefactors of a new paradigm.

imp: ​

 

[PCL_128]

I warned of an economic slowdown more than 6 months ago.

I believe you predicted an actual recession, which was proven yesterday to be false with continued economic growth of 0.6% in the last quarter. I think it's entirely possible that we won't reach a full-blown recession at all. The economy might hover around flat for the next few quarters and then start a steady gain.

Your company is making the right moves in this environment; they're just not the moves that you'd like them to make.

And where do you get that from? I do like the moves they're making. These are smart moves, which is why I previously said that I believe Fornaro is a smart CEO who will do a good job of leading us through the economic slow-down. It might suck that I won't upgrade for a long time, but that's life.

Furloughs at all airlines (except Southwest) will be necessary for them to survive this downturn.

I predict no involuntary furloughs whatsoever at AirTran.

Your Pollyanish analysis of the current financial environment does not make me an extreme pessimist. It merely tells me that you are blissfully ignorant of what's lurking below the surface in the credit markets.

Your analysis is far more extreme than just about every respected economist in the country. I'll listen to the professionals before the arm-chair economist that flies airplanes for a living.

 

[Lear70]

I believe you predicted an actual recession, which was proven yesterday to be false with continued economic growth of 0.6% in the last quarter. I think it's entirely possible that we won't reach a full-blown recession at all. The economy might hover around flat for the next few quarters and then start a steady gain.

I'm pretty certain that 0.6% "growth" excluded the financial markets, specifically the housing market and credit market losses.

When you factor those in (which it's highly frivolous to exclude), the economy was negative for the quarter. That would be like saying AAI posted a profit for the quarter then, in small print, saying "excluding fuel costs".

Figures lie and liars figure. Funny how our Federal Government does the same thing that they criticize big business for... oh wait, it's Bush. Nevermind...

And where do you get that from? I do like the moves they're making. These are smart moves, which is why I previously said that I believe Fornaro is a smart CEO who will do a good job of leading us through the economic slow-down. It might suck that I won't upgrade for a long time, but that's life.

I predict no involuntary furloughs whatsoever at AirTran.

Agreed. I think they're going to come asking for VOLUNTARY LOA's (so they don't have to pay unemployment benefits) with continued medical coverage payments (we pay the lion's share of the premiums anyway), around September.

My prediction is quite a few people will take them; there's a lot of pilots at airTran with side businesses or Guard/Reserve duty options.

Your analysis is far more extreme than just about every respected economist in the country. I'll listen to the professionals before the arm-chair economist that flies airplanes for a living.

Depends on which economist you're talking to. Most of the respected ones are saying the bottom isn't here yet, that we'll likely hit bottom about this time NEXT year. Certainly true for the housing and credit markets, foreclosures and defaults are up again last quarter and will likely accelerate unless there's bipartisan support for that bill that forces government-subsidized fixed-rate refinance for ALL homeowners with an ARM which, in an election year...? Good luck.

A depression? Probably not. A recession? Absolutely.