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Investors could be left high and dry

Frontier Airlines shareholders last in payoff line

By David Milstead, Rocky Mountain News (Contact)

Published July 30, 2008 at 9:05 p.m.

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CLICK TO ENLARGE: List of Frontier's major creditors

CLICK TO ENLARGE: List of Frontier's major creditors

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Bankrupt Frontier Airlines' new financing package is good for the airline, but the math behind the deal suggests the company's unsecured creditors and stockholders will come out with little in the end.

Perseus LLC, a Washington D.C.-based investment company, said Friday it planned to provide $100 million in financing and, if all goes well, get 79.9 percent of the stock of the new, post-bankruptcy Frontier.

The numbers could change in the months before Frontier emerges from bankruptcy, possibly in spring 2009. They suggest, however, that the remaining 20 percent of the stock in the new company would be worth about $25 million.

That sounds like a bonanza for Frontier shareholders, since the airline's stock, trading at about 30 cents, gives the company a market value of about $11 million.

But it neglects to consider the fact that Frontier still has hundreds of millions of dollars of claims and secured and unsecured debts to take care of in order to emerge from Chapter 11.

Holders of secured debts and priority claims are in line ahead of unsecured creditors. And unsecured creditors will want to be made whole before holders of Frontier's pre-bankruptcy common stock get a penny.

Giving new stock to those creditors, not existing shareholders, is one of the primary ways a company settles its debts.

Much of Frontier's secured debt is related to the financing of its aircraft fleet. Frontier can sell planes to pay some creditors or rework the terms of its leases, since it will still need planes to fly.

Lee Kutner, a Denver attorney who specializes in business bankruptcies, said secured creditors in this situation could get cash or recoup the debts over time.

"Most likely, the unsecured creditors are in line for the stock," he said "They're truly the owners of the company at this point."

Added Joe Landen, portfolio director of Denver-based Madison Capital, an investor in distressed assets: "It just implies there's not a whole lot of value past the secured creditor."

Frontier CEO Sean Menke declined to predict how creditors will come out. "There are a lot of constituents who will be vying for what remains, outside of the primary investor."

Finance editor David Milstead can be reached at milstead@RockyMountainNews.com or 303-954-2648.