Don't look at the stock price (bad) — look at the bond price (also bad)
When two corporations (and their shareholders) love each other very much, they do a special hug called a merger. Back in April 2022, JetBlue Airlines was really excited to do a merger with Spirit Airlines. Frontier Airlines had planned to do it first, ponying up $2.9 billion to do so, but then JetBlue threw down $3.8 billion. Spirit’s shareholders loved that offer very much, and in October that year the two companies agreed to merge.
But sometimes, when two American corporations are too big, or when together they control too much of their respective industries, the federal government comes in and says Hold on there, as it did to the JetBlue-Spirit merger last March. After a lot more chatting in front of a judge, the two companies were told that they could not merge. (They can appeal, but it’s not clear whether they will.)
Spirit Airlines has been devastated. And it’s not just mere sadness — the company looks like it might die of heartbreak. Spirit stock plunged by almost half the day of the judge’s ruling on Tuesday. It kept dropping Wednesday, and slid another 7% on Thursday.
But let’s talk about the bond price.
Fitch Ratings, putting it politely, said Wednesday that Spirit “faces serious headwinds toward improving its profitability.” The company has been losing money for a while now, to the point that it had to sell some of its planes and lease them back to save money. The Wall Street Journal reported on Thursday that a gaggle of analysts see the downside risk might be going all the way down: A Chapter 11 (reorganization) bankruptcy might be on the horizon, if not a Chapter 7 (liquidation).
One of the biggest issues facing Spirit is its debt, which it had been hoping JetBlue would absorb in the merger. Without that windfall, it’s staring down a $1.1 billion bond due next September and not a lot of free cash with which to pay it off.
The price for that bond back in October 2022? More than par, or the initial price given the 8% interest rate. Basically, it means that bondholders expected to get their money back. That pushed the yield, or the amount someone purchasing some of that debt could expect to make on it, down to 7.2%
The yield when the government moved to block the deal in March 2023? About 8.4%. Not bad.
The yield now? More than 70%. Not good.
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