In recent weeks, we’ve covered various liability management strategies, including the ‘double-dip’ and Robertshaw’s repeated uptiers. Now, Spirit Airlines’ lenders are preparing a creative strategy of their own.
The Backstory
In January, federal antitrust regulators blocked Spirit’s planned $3.8 billion sale to JetBlue. Both parties had initially appealed the decision, but, perhaps hastened by a February CEO transition at JetBlue, announced last week their decision to walk away from the deal.
JetBlue will pay Spirit a $69 million termination fee (plus $400 million to Spirit shareholders), but the scrapped deal now threatens Spirit’s ability to continue as a going concern. The carrier last posted a profit before the Covid-19 pandemic and is reckoning with a $3 billion debt burden.
With $1 billion of its debt maturing in 2025 and 2026, Spirit has retained advisors Davis Polk & Wardwell and Perella Weinberg Partners as it prepares to begin discussions with lenders over potential options. The bondholder group is working with Evercore and Akin Gump.
Never Before Seen Triple-Dip
This week, Bloomberg reports that Spirit Airlines bondholders are developing a ‘triple-dip’ legal strategy as they become increasingly concerned over the airline’s liquidity position. The group is hoping to optimize its own chances of a full recovery, even in the event Spirit is unable to repay all creditors in full.
Their plan is based on a 2020 Spirit bond sale in which a subsidiary of the company sold notes backed by the airline’s loyalty program, before transferring proceeds from the financing to the parent company, which then also guaranteed the debt.
The combined maneuvers are similar to a ‘double-dip,’ in which a distressed company entices new money lenders with added repayment assurance by providing them with two claims on the company’s assets for every dollar they lend (to the detriment of existing non-participating lenders).
In Spirit’s case, bondholders believe they may have three claims (the ‘triple-dip’)–Spirit’s guarantee, the intercompany loan (when it transferred proceeds from subsidiary to parent), and the loyalty program.
One key difference: rather than providing better terms on a deal to bring in new money when financing would otherwise prove challenging, the current claims have been in place for years.
Per Bloomberg, the bondholder group is preparing to present its case to Spirit as added leverage in upcoming negotiations. It may be powerful leverage—the group says its claims effectively bar Spirit from raising new financing as the company has no other assets left to secure against.
A Triple-Dip, Or Is It?
The ‘triple-dip’ has never been done before, and that may still be true. Reorg senior covenant analyst Julian Bulaon takes issue with the triple-dip label for Spirit’s situation. His position: “This is a double dip plus some extra credit support.”
Under either interpretation, the stage is also set for another potential first: the bondholders’ claim on Spirit’s frequent flyer loyalty program. Such a loyalty claim has never been tested before in a bankruptcy or restructuring.
For bondholders, this claim may actually have limited benefit—the value of these assets (branded credit cards and customer subscriptions) is likely to fall dramatically should Spirit face a disruptive outcome.
An out-of-court restructuring has a better chance of preserving loyalty program value, while a bankruptcy could erase its value entirely. Securities backed by the assets traded down nearly 36 percent the week after the sale to Jetblue was blocked.