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Creditors present Frontier Airlines $75 million loan proposal

By Chris Walsh, Rocky Mountain News (Contact)

Published August 4, 2008 at 9:05 p.m.

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Frontier Airlines has received an offer for up to $75 million in bankruptcy loans from its largest unsecured creditors, a deal the company says is more favorable than a recent proposal it received from investment firm Perseus LLC.

Denver-based Frontier said Monday it intends to pursue the new offer, which calls for an initial loan of $30 million and up to $45 million more going forward.

The funding, offered by Republic Airways Holdings, Credit Suisse, AQR Capital and CNH Partners, will provide the carrier with a cash cushion that can be used for working capital. The loans will be secured by Frontier's assets, although the lenders' initial unsecured claims will remain intact.

Frontier executives called it a "strong vote of confidence" in the company and its business plan.

"After a careful examination of this offer against the offer Perseus provided last week, we believe this new agreement offers immediate access to greater liquidity under more favorable terms," Sean Menke, Frontier's chief executive officer, said in a statement.

The bankruptcy court overseeing Frontier's Chapter 11 restructuring must approve the deal. A hearing is scheduled for today, and Frontier could have access to the first $30 million loan by Friday, company spokesman Steve Snyder said.

But Frontier might face some opposition from worker groups. The unions representing pilots and mechanics have officially objected to a provision in the Perseus deal about proposed wage and benefit cuts. That provision remains in the new proposal.

Observers were surprised that Frontier received a competing offer, largely because it's difficult to secure such financing in the current economic environment.

"This is unexpected, but it seems pretty good for Frontier," said George Hamlin, a managing director at aviation consulting firm Airline Capital Associates. "Either way it gets financing."

The new agreement comes just several weeks after Frontier announced the tentative agreement with Washington D.C.-based Perseus for up to $100 million in loans and financing to help the carrier emerge from Chapter 11. In exchange, Perseus would have the opportunity to convert its debt into stock in the reorganized company, giving it a 79.9 percent equity stake.

Frontier said in a bankruptcy court filing that the proposal from its creditors includes lower interest rates, lower fees and borrowing costs as well as less-stringent requirements than the deal with Perseus. The company also won't have to give up a majority equity stake, allowing Frontier "to assess their reorganization options from a position of greater financial strength," according to the filing.

On top of that, Frontier's creditors' committee supports the plan, which gives it a better chance of winning court approval.

Frontier, though, likely will still need to secure some kind of financing to actually fund its emergence from bankruptcy.

"This gives us cash available now at better terms," Snyder said. "We can continue to operate the business and realize all the changes we put in place. Outside investors can now watch the company operate, and hopefully we should be attractive for investment options as we emerge."

Perseus executives said they modified some of the terms of their deal to make it more attractive than the creditor proposal. Brian Leitch, a senior managing director with Perseus who works in Evergreen, said the firm offered to lower the interest rate on the loans to 15 percent.

"Our proposal is better for Frontier in every material respect, in all the basic provisions that anyone who borrows money can understand," Leitch said via telephone from Turkey. "It also provides an equity commitment that we believe would give consumers confidence in Frontier, showing that the company's lenders want to see a successful reorganization. We are pretty perplexed with their decision."

Frontier said there are no penalties at this point for abandoning the Perseus proposal. Perseus officials said it's something that the bankruptcy court might have to weigh in on, and they declined to say whether the firm will further modify its plan.

Frontier said the creditor plan resulted from the Perseus offer and the airline's recent steps to boost its cash balance by $80 million through aircraft sales.

The carrier has been seeking such financing since plunging into bankruptcy in April. Frontier had $66.8 million in cash and short-term investments in June, a steep drop from $118.5 million at the end of May. Frontier attributed most of the decline to back payments related to its aircraft leases. The company wasn't required to make those payments for two months following its bankruptcy filing and had to play catch-up after deciding to assume its leases.

walshc@RockyMountainNews.com or 303-954-2744

A better deal?

Frontier said the new offer contains several benefits over the proposal with Perseus. Among them:

* No equity stake - Frontier would not give up an equity stake in the company under the creditor proposal. In the Perseus deal, Frontier would have to give up as much as 79.9 percent of the company once it reorganizes.

* Better interest rate - The loans would carry an interest rate of between 14 percent and 16 percent. Under the Perseus deal, the loans would carry a 16.5 percent interest rate, although Perseus said it offered to lower that to 15 percent.

* Unsecured creditor approval - The creditors' committee in Frontier's bankruptcy case approves of the new deal, which makes it easier for the carrier to win bankruptcy court approval.

* Less-stringent cash requirements - The carrier would be required to have at least $15 million in aggregate cash on hand for the first round of financing, compared with $26 million in the Perseus deal.

What's next

* The U.S. Bankruptcy Court overseeing Frontier's case will hold hearings today to address the financing deal, among other issues.

* If the court approves the deal, Frontier will have access to the first $30 million in loans as early as Friday.

* After a 30-day period, Frontier can request up to $45 million more in loans. It will have to meet certain financial requirements.

* Frontier likely will need to find additional financing to emerge from bankruptcy.

The creditors

Breakdown of how much each unsecured creditor will provide Frontier in the first loan installment:

* Republic Airways Holdings: $12.5 million

* Credit Suisse, Cayman Islands Branch: $10 million

* AQR Capital: $6.5 million

* CNH Partners: $1 million

Comments

  • August 5, 2008

    8:33 a.m.

    Suggest removal

    jacka writes:

    But what will the Teamsters say?

    Oh dear can't we all just get along.......