Continental Airlines has issued an unusual $200 million private-debt placement, using its spares stock as collateral. The move echoes a placement by Trans World Airlines (TWA) more than a decade ago, known as the "light bulb offering", which was seen as a sign of desperation.
The deal, struck on 2 December, was described by one analyst as innovative and well structured. Joel Denny, managing director of US Bancorp, praised the participation of MBIA Insurance, which guarantees interest payments in the event of a default, shifting the credit risk from Continental. The deal charges the airline only 2.3% interest, reflecting the placement's blue chip AAA credit rating. Continental's own unsecured debt is low-quality junk. In return, MBIA will receive undisclosed commission fees, running to tens of millions of dollars.
"It's a unique structure that says more about their creativity than about their viability. TWA could not make money in a great market. Continental is close to break-even in a terrible market," Denny says.
But Continental's move may mean the carrier is running short on cash. The airline estimated last month that it will have about $1.1 billion in cash on 31 December, excluding last week's offering. At its present cash-burn rate, the airline has until June before it dips below its required minimum cash holding of $500 million.
Furthermore, Continental is running out of collateral. Its aircraft are encumbered with debt, and the airline has only $1 billion in unencumbered assets (including spares), and 34 million shares in its regional affiliate ExpressJet. The regional arm's shares were trading at around $11 last week, valuing Continental's holding at $374 million.
However, the stock has fallen from its May flotation price of $16, making management reluctant to sell. Despite last week's deal, the airline is still under tremendous pressure to cut costs fast. It hopes to save $350 million next year, but even this may not be enough to get by without more debt issues.
Source: Flight International
