Cal
CAL is not out of the woods.....
READ THIS (for you CAL types that want UAL to die)
Perfectly Hedged: Continental Will Go Bankrupt No Matter What Happens to Fuel Prices
[FONT='Verdana','sans-serif']Let me begin with the facts.[/font]
At the end of 2008,CAL ]had approximately $2.6 billion in unrestricted cash and short-term investments. It lost $464 million (in cash) in the third quarter of 2008. It lost $327 million (in cash) in the fourth quarter. By the end of 2008, it had also lost an additional $415 million courtesy of its fuel-hedging program. (This money has not yet been paid, as the futures contract has not yet expired. If fuel prices continue to fall, still more money will be owed.)[/font]
Thus, in the midst of a six-month period during which Continental's primary operating cost (oil) fell from $147 per barrel to $32 per barrel, the company managed to lose a total of $1.2 billion.
Continental is perfectly hedged.. It loses money in all operating environments. And very shortly, it will run out of money altogether.
The company must maintain at least $1 billion in unrestricted cash, according to the terms of its $350 million revolving credit facility. A default on this covenant would trigger a cascade of cross defaults on its entire $5.9 billion debt complex
But that's not all... Because the airlines have gone bankrupt so many times, two of the major credit-card firms (Chase and American Express) that partnered with Continental to provide frequent flyer/credit-card club benefits require Continental to post escalating amounts of collateral if its unrestricted cash balance falls to less than $2 billion or if its credit rating falls below Caa3. These demands for collateral go from $72 million to $229 million to $958 million as Continental's cash reserve falls.
It's hard to know exactly how the death spiral will develop. But what equity investors should know is that if Continental's cash balances fall to less than $2 billion, all bets are off. At that point, any further cash losses or ratings downgrades will almost certainly push the company directly into bankruptcy, triggered by the demands for collateral by the credit-card processors and the terms of its revolving credit facility.
In short, at the start of 2009, Continental was about $600 million away from the beginnings of a death spiral
As I mentioned, it is currently losing approximately $300 million-$400 million per quarter on its operations. Continental explains why: "A prolonged recession in the U.S... continues to contribute to the loss of business and leisure traffic, particularly the loss of high yield international traffic in our first class and BusinessFirst cabins...."
Even without any more financial problems, Continental will likely run out of money simply from the operating losses of the first two quarters of 2009. The most recent numbers show Continental is running 13% behind last year in terms of traffic and about 12% behind last year in terms of revenue per seat-mile, a standard industry sales metric.
If that doesn't do it, there are many more nails out there. Recall the company hasn't yet paid its $415 million oil derivative obligation. It's only posted $171 million in additional collateral. The remaining $244 million obligation will be due at year-end.. Also due before year-end are $832 million in long-term debt and $551 million in aircraft-purchase obligations. That's at least $1.6 billion in nonoperating obligations due this year. There's simply no money left to pay them..
The bond market has passed its effective judgment. Continental's $200 million outstanding 8.75% coupon notes due December 2011 are now trading at 60¢ on the dollar, yielding 31%. Clearly, the bond market doesn't expect this coupon to be paid or these bonds to be repaid at par. These bondholders would have to be repaid in full before common stock holders received anything in the event of bankruptcy, which means the intrinsic value of Continental's common stock is almost surely zero. Meanwhile, the stock market is pricing it at $900 million.
Action to take: Sell short Continental Airlines (NYSE: CAL).Use a 25% stop loss, as the stock is likely to be extremely volatile below $5. Given the company's overwhelming debt load and the high risk of a near-term covenant default, I would hold the stock short until it is trading below $1.
