Frontier Airlines to sell $80 mln convertible debentures

[RiteSideUp]

Does anyone know what this means? I'm not sure if they are raising capital or it its just some benign paperwork filing. Any thoughts?

Here is the link

debentures
Tue Nov 29, 2005 07:51 AM ET

Nov 29 (Reuters) - Frontier Airlines Inc. (FRNT.O: Quote, Profile, Research) on Tuesday said it plans to sell $80 million of convertible debentures due 2025. The company said in a statement it expects to grant the underwriters an over-allotment option to buy up to an additional $12 million of debentures. The low-cost carrier also said the interest and conversion rates and offering price are to be determined through negotiations between the company and the underwriters. (Reporting by Arpan Mukherjee in Bangalore)

 

[sluggo]

No Idea! No rumors either, that I know of. Any Ideas would be appreciated. Thanks for posting. Sluggo

 

[Peleton]

How is this for an idea....

Sell the bonds, pick up the cash, get in on the fire sale in IAD for the 319's. Drop the IDE pilots and bring the aircraft home. The extra cash would be to replace the deposits for the 8 or so additional IDE 319's due in 2006-2007.

 

[sluggo]

Impressive insight!

 

[RiteSideUp]

How many airbii does independance have?

 

[be-400xpdriver]

What about E-190's? I talked to a F9 guy and he said management was looking at getting a few.

 

[JetSpeed219]

The article I read says they might be in trouble........

http://finance.myway.com/jsp/nw/nwdt_rt_top.jsp?cat=TOPBIZ&src=202&feed=bus&section=news&news_id=bus-bau967242&date=20051129&alias=/alias/money/cm/nwhttp://finance.myway.com/jsp/nw/nwd...967242&date=20051129&alias=/alias/money/cm/nw

 

[radarlove]

Convertable debentures are debt that has an option attached for the holder to convert it into stock if the stock price hits a certain level. Strong companies often avoid these, because they have to pay out more to pay off the debt than the debt was issued for if the stock does well.

However, the conversion factor is a good sweetener if the interest rate without a covertable option is too high for the company to afford. It can often get a lower interest rate by giving debt holders the unlimited upside of a conversion right. Think of it this way, I borrow $100 bucks from you, but as part of the contract, if my stock hits $105, you can trade your $100 in debt for $105 in stock. So you get the interest payments on $100 in debt until you convert, then you get an extra 5%, so your effective interest rate could be over 10%. Good for you, bad for me, 'cause I'd rather pay just interest.

The market sure didn't like this issuance, though, the stock went down significantly. The risk factors (see "pimp-slapped" topic) listed on the offering sounded like they got together to build a war-chest right after SWA announced Denver, they sound like theyr'e going to need lots of cash, which makes the debt more risky.

We'll see, but I think the market smells blood in the water.

 

[F9 Driver]

I think the 80M is for expansion, replenishing our coffers for the coming fare wars in DEN, and for expansion.

There was a piece on CNBC this morning about how many of the airlines are stocking up their bank accounts by taking on debt. FWIW.

The articles Jetspeed posted and that Radarlove tactfully titled as “pimp slapped” quote our latest SEC filing 8K. All our SEC filings have to show the down side potential (risk) to our shareholders. They disclose everything from future possible terrorist activity to increased competition. http://biz.yahoo.com/e/051129/frnt8-k.html

I think the 80M is a good thing, and the stock sell off is a buying opportunity. I don’t see us buying anybody, but hey I’m just an airline pilot. If I ran the airline I’d be a whole lot richer!

 

[Avee8tr]

Read this:

http://wvgazette.com/section/News/2005112824

 

[F9 Driver]

West Virginia - The home of the tooth brush (anywhere else and it would have been the teeth brush) - is always at the fore front of aviation. Gen Yeager not withstanding.

 

[PCL_128]

We'll see, but I think the market smells blood in the water.

Yes, and we all know how well the market understands this industry. Remember what AMR and DAL stock sold for back in '00? Sorry, but efficient market theory is all but debunked, so saying that the market smells blood in the water is really irrelevant. Investors are morons and act on emotion rather than facts. I don't think F9 is in any real trouble at this point. Their balance sheet looks pretty good considering the industry they're in.

 

[radarlove]

Sorry, but efficient market theory is all but debunked, so saying that the market smells blood in the water is really irrelevant. Investors are morons and act on emotion rather than facts. I don't think F9 is in any real trouble at this point. Their balance sheet looks pretty good considering the industry they're in.

The effcient market theory has been debunked? That must be news to the Nobel Prize folks, since they haven't recognized this yet, apparently.

BTW, do you even know what the efficient market hypothesis is?

And, what, exactly, "looks pretty good" on the F9 balance sheet? Could you be more specific?

 

[PCL_128]

The effcient market theory has been debunked? That must be news to the Nobel Prize folks, since they haven't recognized this yet, apparently.

BTW, do you even know what the efficient market hypothesis is?

I don't need the Nobel Prize "folks" to tell me that efficient market theory is crazy. Anyone can see it. We can always continue this discussion over in Non-aviation chat if you'd like, but I think you know as well as I do that the theory is largely ignored nowdays.

And, what, exactly, "looks pretty good" on the F9 balance sheet? Could you be more specific?

A quick glance shows that revenue has been steadily growing for the past several years. The latest EPS estimates show that many analysts predict positive EPS for the next 2 years. Sales growth is estimated at 20% annually for the next 10 years. Debt is pretty much in line with the rest of their segment of the industry. Five-year average margins have been decent. Would you like me to go on? The fundaments are there for a good investment. I don't think SWA can have much of an effect on them in their home market, so the risk is low as far as I'm concerned. Everyone gets worried when SWA moves into town, but the truth is that Frontier offers a far superior product.

 

[radarlove]

I don't need the Nobel Prize "folks" to tell me that efficient market theory is crazy. Anyone can see it. We can always continue this discussion over in Non-aviation chat if you'd like, but I think you know as well as I do that the theory is largely ignored nowdays.


A quick glance shows that revenue has been steadily growing for the past several years. The latest EPS estimates show that many analysts predict positive EPS for the next 2 years. Sales growth is estimated at 20% annually for the next 10 years. Debt is pretty much in line with the rest of their segment of the industry. Five-year average margins have been decent. Would you like me to go on? The fundaments are there for a good investment. I don't think SWA can have much of an effect on them in their home market, so the risk is low as far as I'm concerned. Everyone gets worried when SWA moves into town, but the truth is that Frontier offers a far superior product.

Um, I thought you said "balance sheet". Where, exactly on the balance sheet does revenue show up? I guess I missed that special accounting course you took.

And no, the efficient market hypothesis is not "crazy", it works pretty well, almost all of the time. There are some anomalies and if you can exploit them fast enough you can build fabulous wealth. Well, not "you", since you don't know what a balance sheet is, but "one" can build wealth.

If you don't think the market is pretty good at taking new data in, analyzing it and spitting out a pretty reasonable stock price, then why ain't you rich? I mean, you're so much smarter than the efficient market and all, you have to be playing them for chumps, aren't you? Since they're all "crazy"?

 

[Lampshade]

nice work Radar!!!

 

[PCL_128]

Um, I thought you said "balance sheet". Where, exactly on the balance sheet does revenue show up? I guess I missed that special accounting course you took.

And no, the efficient market hypothesis is not "crazy", it works pretty well, almost all of the time. There are some anomalies and if you can exploit them fast enough you can build fabulous wealth. Well, not "you", since you don't know what a balance sheet is, but "one" can build wealth.

If you don't think the market is pretty good at taking new data in, analyzing it and spitting out a pretty reasonable stock price, then why ain't you rich? I mean, you're so much smarter than the efficient market and all, you have to be playing them for chumps, aren't you? Since they're all "crazy"?

I wasn't merely referencing the balance sheet, I was pointing out their overall financial condition and prospects. If you want to limit yourself to the balance sheet, then take a look at page 30 of the 2005 annual report. You'll find that Frontier's cash position has actually grown since 9/11, and by quite a bit. Nearly $200 mil in the bank isn't too bad for an airline of Frontier's size.

If you want to believe efficient market theory, then have it. In the past couple of decades there has been copious amounts of research done by many respected universities that points away from EMH. A simple Google search will point you to many of the reports (speaking of Google, the outrageous price of Google shares is an excellent example of when EMH doesn't work by the way). The market is filled with companies whose stock isn't even close to what an efficient market would price. You call these instances "anomalies," but they are far too widespread and common to be such. Again, this conversation really should be in the Non-Aviation forum though.

 

[F9 Driver]

I think they call it "blue sky" disclosure.



http://today.reuters.com/investing/...8909_RTRIDST_0_AIRLINES-FRONTIER-UPDATE-2.XML

UPDATE 2-Frontier plans to sell debt, braces for Southwest
Tue Nov 29, 2005 4:38 PM ET

WASHINGTON, Nov 29 (Reuters) - Frontier Airlines Inc. (FRNT.O: Quote, Profile, Research) said on Tuesday it would sell debt to raise $80 million and cautioned investors about potential consequences of increased competition next year at its Denver hub.

The company noted in a Securities and Exchange Commission filing the potential drawbacks of competing with a restructured United Airlines (UALAQ.OB: Quote, Profile, Research) and Southwest Airlines (LUV.N: Quote, Profile, Research), which will start service there in January with flights to Chicago Midway, Las Vegas and Phoenix.

Frontier warned of possible low-cost fare wars, predatory pricing and competitors placing additional planes on selected routes to drive up capacity.

"The future activities of United, Southwest, and other carriers may have a material effect on our revenues and results of operations," Frontier said.

Other low-cost competitors JetBlue Airways (JBLU.O: Quote, Profile, Research), AirTran Airways (AAI.N: Quote, Profile, Research) and Alaska Airlines (ALK.N: Quote, Profile, Research) have also launched service from Denver within the past three years.

Frontier also said it is trying to acquire financing for four of 11 Airbus A319s it has committed to purchase, but could not guarantee that it will be successful. The airline also plans to lease up to four A319s.

The company said an inability to acquire the planes could have a material adverse effect on cash balances or delay aircraft deliveries that would impair its long-term growth plans.

The airline said its advisory to Wall Street was standard boilerplate language for the types of financial challenges facing airlines.

Frontier's shares closed off 68 cents, or 7.7 percent, at $8.21 in Nasdaq trading on Tuesday.

Analyst Ray Neidl of Calyon Securities said the share decline was likely due to the offering of $80 million worth of debt that can be converted to stock -- drawing concerns that outcome could dilute profits.

"They took advantage of a relatively strong airline market to raise some cash," Neidl said.

Frontier ended the second quarter with $185 million in unrestricted cash, short-term investments and working capital.

Colorado-based industry consultant Michael Boyd said Frontier is well positioned to compete with Southwest in Denver but still needs extra cash.

 

[radarlove]

You'll find that Frontier's cash position has actually grown since 9/11, and by quite a bit. Nearly $200 mil in the bank isn't too bad for an airline of Frontier's size.

Then why are they offering convertable debentures if they have a strong cash position?

And why did the stock price decrease when they did this?

The market is filled with companies whose stock isn't even close to what an efficient market would price. You call these instances "anomalies," but they are far too widespread and common to be such. Again, this conversation really should be in the Non-Aviation forum though.

Well, then, how come you aren't getting rich from these mispricings? Again, if the effcient market hypothesis is "crazy", then there should be lots of profit opportunities for smart guys like you. If there aren't that many profit opportunities, then that means the market is pretty effecient, doesn't it?

If you disbelieve Google's price, why haven't you shorted it? Again, you claim the market is wrong, but do you KNOW the market is wrong? Enough to put your money where your mouth is? You may not have enough money to short a huge number of shares, but I'm sure you can buy some Google put options and not starve. If the market is obviously wrong, why aren't you profiting from it?

Simply stepping back, crossing you arms and stating that the whole world is crazy isn't a strong enough argument for people like me. If the market is crazy, than prove it. Pretty easy to do, just open a brokerage account and take the chumps money from them.

 

[canyonblue]

Everyone gets worried when SWA moves into town, but the truth is that Frontier offers a far superior product.

Well it all starts at point A to point B, genius. After that it’s the intangibles. You should understand that by flying an RJ.

 

[PCL_128]

Then why are they offering convertable debentures if they have a strong cash position?

And why did the stock price decrease when they did this?

I think some of the F9 guys are right about the company trying to raise money for growth with new airframes, but it could be anything. The fact is that the company has roughly $180 mil in cash, so they aren't going to be in trouble any time soon. Why the market reacted the way it did is anyone's guess. As I said, I don't believe that the market behaves rationally in the short term.

Well, then, how come you aren't getting rich from these mispricings? Again, if the effcient market hypothesis is "crazy", then there should be lots of profit opportunities for smart guys like you. If there aren't that many profit opportunities, then that means the market is pretty effecient, doesn't it?

If you disbelieve Google's price, why haven't you shorted it? Again, you claim the market is wrong, but do you KNOW the market is wrong? Enough to put your money where your mouth is? You may not have enough money to short a huge number of shares, but I'm sure you can buy some Google put options and not starve. If the market is obviously wrong, why aren't you profiting from it?

Simply stepping back, crossing you arms and stating that the whole world is crazy isn't a strong enough argument for people like me. If the market is crazy, than prove it. Pretty easy to do, just open a brokerage account and take the chumps money from them.

I have several brokerage accounts, and I've made quite a bit of money in the past few years by buying up stock that the supposedly efficient market drove down. The market behaves in a very radical manner in the short term. Contrarian investors take advantage of that and buy stocks when they are ridiculously cheap. An efficient market wouldn't drive stocks to such an absurdly low price so guys like me can scoop them up and reap the benefits. Guys like Buffet and Lynch have been taking advantage of the inefficient market for years.

As for Google, you've got to be kidding me. Did you sleep through the tech runup of the late 90s? This is identical! Google shares are absurdly overpriced, just as the tech/internet stocks were in the late 90s. These guys are going to get burned. It's just a matter of time. I might end up shorting it eventually, but shorting isn't something I usually do. I prefer to buy stocks when they are unfairly driven down by the market. I think there's a few good opportunities for shorting right now though. Google is one example, but oil is the big one.

 

[radarlove]

So you're loading up on F9 stock, since the market has mispriced it?

 

[PCL_128]

So you're loading up on F9 stock, since the market has mispriced it?

I'm considering it. I generally don't buy airline stock, but I have purchased Airtran in the past. I'm going to look over the F9 statements a little bit more before making a decision. A 7% drop yesterday was certainly ridiculous, and if it holds (it is today) then I may buy some shares in the next week. I don't like making spur-of-the-moment decisions though, so I need to look over things a little bit more.

 

[USMC319]

PCL 128,
I agree that the market overreacts to certain events in the airline business. For example, I loaded up on Value Jet stock when they augered one into the everglades because even though they had their operating certificate revoked, I knew they would be back, because essentially they provided a good product for a fair price. I sold my Airtran (Value Jet) stock at nearly $20 per share when it ran up a couple of years ago. I did the same thing with Frontier stock after the Southwest to DEN announcement. Simply overreaction.

 

[RiteSideUp]

This article about F9 was in the USA Today, today. I think it is a little more positive than a lot of other articles out there and it seems to offer some insight about their situation.

Link to article

Debt offering hits Frontier stock price
By Dan Reed USATODAY
DALLAS — Frontier Airlines' (FRNT) stock fell 7.7% Tuesday as the discount carrier's announcement of an $80 million debt offering spooked investors already jittery about Southwest's (LUV) plans to launch service at Denver in January.
In a Securities and Exchange Commission filing, Frontier warned that failure to secure financing for four new Airbus A319s could hurt its financial condition, liquidity and growth prospects. It also repeated warnings that increased competition from United and Southwest on certain routes could result in fare wars and predatory pricing. Frontier said it will raise that $80 million through the sale of notes that eventually could convert into common stock. The stock closed at $8.21, down 68 cents.
Analyst Ray Neidl at Calyon Securities downplayed Frontier's warning. "This is an ordinary debt issue," similar to recent financial moves by other airlines to build their cash reserves, he said. "Frontier can be very competitive with Southwest. They're the hometown airline. They have live seat-back TV and assigned seating, two things Southwest doesn't offer but which have proven to be popular with travelers. They have low fares."
Not counting fuel costs, Frontier spends 5.86 cents to fly one seat one mile, vs. 6.31 cents for Southwest. Southwest, however, has a significant advantage on fuel costs because of its industry-leading price-hedging program.
Still, "Denver won't be like Philadelphia," a market into which Southwest moved rapidly last year and took advantage of high-cost US Airways, which was in bankruptcy reorganization, said industry consultant Michael Boyd. Frontier and United will make the going there much tougher, said Boyd, who is president of the Boyd Group in Evergreen, Colo., a Denver suburb.
Frontier has nearly 20% of the Denver market; United, 60%.
"People who are assuming that Frontier will crumble don't understand that Frontier has some real strengths."

 

[Kane]

It is a financial move! F9 sold the 80million notes to pay for the A319's so that they don't have to lease them. It is only a way to raise cash.

 

[jetalc]

Um, I thought you said "balance sheet". Where, exactly on the balance sheet does revenue show up? I guess I missed that special accounting course you took.

And no, the efficient market hypothesis is not "crazy", it works pretty well...blah, blah, blah...

If you are through comparing pecker size, can we get back to the discussion?

 

[F9 Driver]

So you're loading up on F9 stock, since the market has mispriced it?

Could be!!:beer:

Frontier Airlines shares rose 1.5% to $8.27 after Prudential Equity Group initiated coverage of the stock (FRNT:8.27, +0.12, +1.5%) at neutral weight with an $11 price target.

http://www.marketwatch.com/news/yho...o&guid={17E822DB-FADD-47C1-9347-2CD21BA2A678}

 

[Texx]

Could be!!:beer:

Frontier Airlines shares rose 1.5% to $8.27 after Prudential Equity Group initiated coverage of the stock (FRNT:8.27, +0.12, +1.5%) at neutral weight with an $11 price target.

SKYW will purchase F9 for a stock swap.

 

[USMC319]

SKYW will purchase F9 for a stock swap.

Why? Interesting proposal, but I would think that this move would jeopardize Skywest's relationship as a feeder carrier with its major airline partners, whom are Frontier's competitors. In any case both companies are fine carriers in their seperate and specific niches.