PNCL - Pinnacle Airlines

[PlanMaestro]

I spent some time on this yesterday guys, and what I can figure is the following:

 

Thanks for that very detailed info Michael! Do you have a link to the court documents?

[MYDemaray]

Here it is...

http://dm.epiq11.com/PinnacleAirlines/Docket#Debtors=4615&RelatedDocketId=&ds=true&maxPerPage=25&page=1

 

of special interest are Sean Menke's declaration, the 90 day cash flow projections, request for DAL DIP approval, the agreements with United and US Air and of course all of the rejections

[MYDemaray]

Here are some excerpts from Shapiro's declaration (restructuring guy from Barclay's):

 

"As of the Petition Date, the Debtors have approximately $45 million in available cash. The Debtors’ projections show that, by the end of June 2012, the Debtors will have less than $5 million in available funds remaining, if they didn’t receive the Delta DIP loan and Delta were authorized to exercise their set-off rights, which the Debtors believe is insufficient to operate their business in the ordinary course."

 

"In October 2011, the Debtors, together with Barclays, began to explore strategic alternatives to bolster the Debtors’ liquidity position. In order to raise capital, the Debtors and their advisors believed the Debtors needed to put in place a sustainable, restructured long-term business plan, which required the modification of agreements with three of the Debtors’ key constituencies: Delta, United Air Lines, Inc. (together with its affiliates, “United”), and the Debtors’ various labor constituencies (the “Labor Groups”). Barclays began contacting potential investors, including existing large shareholders, to gauge interest in a capital raise premised on implementation of amended agreements with Delta, United, and the Labor Groups. Barclays initially contacted 12 potential investors, three of which submitted proposed term sheets for capital raises of approximately $40 million, each containing a condition to closing that restructured agreements, acceptable to such respective investors, be entered into with the Labor Groups, United, and Delta."

 

In early January 2012, Barclays contacted potential third-party lenders regarding DIP financing, including three investors that had provided term sheets during the out-of-court capital raise process and 14 other parties, including CIT and United. Eight of the DIP candidates immediately declined or failed to respond, while others signed confidentiality agreements and conducted significant due diligence, but later declined to provide the Debtors’ with DIP financing. Ultimately, the Debtors received only one written proposal for DIP financing other than Delta’s proposed DIP financing.

15. The Debtors received a proposed term sheet on March 17, 2012 from one potential DIP financing source who had signed a confidentiality agreement. That party performed some due diligence and the Debtors and their advisors engaged in discussions over the proposed terms contained in the term sheet. On March 29, 2012, that party unilaterally withdrew its proposal.

16. Several factors made it difficult for the Debtors to obtain DIP financing from parties other than Delta. First, the Debtors have limited unencumbered collateral to provide to potential DIP lenders, principally including cash, receivables, 14 owned Saab 340B aircraft, ground handling equipment, and other miscellaneous equipment. In addition, the Debtors could not grant second liens on any of their encumbered assets that were subject to both negative pledge provisions and section 1110 of the Bankruptcy Code because granting such second liens may constitute an incurable breach of the applicable first lien agreement.

17. Second, if the Debtors obtained DIP financing from a third party, Delta would have the right to seek authorization from the Bankruptcy Court to exercise its alleged right to set-off payments it would owe to Pinnacle under the Delta Connection Agreements for services provided prepetition against prepetition amounts that Pinnacle owes Delta under the Delta Connection Agreements and the Promissory Note. Given the risk and uncertainty that a third party DIP lender would face in connection with Delta’s potential assertion of large set-off claims and the costs and delay that could result from litigation of such claims, a third-party DIP lender would need to provide approximately $10 million more financing than a comparable DIP from Delta to account for the potential liquidity shortfall such a set-off could cause.

18. Finally, each of the Delta Connection Agreements contains a “change of control” provision, granting Delta the right to terminate the applicable agreement in the event specified amounts of beneficial ownership in the Debtors is acquired by certain third parties (collectively, the “COC Provisions”).4 Accordingly, the Debtors’ ability to raise equity to repay a third party DIP facility or otherwise raise funds for emergence from chapter 11 are limited because the Debtors will not be able to sell a controlling equity stake upon reorganization without Delta’s waiver of the COC Provisions.

19. As described above, the Debtors entered into preliminary negotiations with Delta in January 2012 regarding DIP financing. Term sheets were exchanged but there were still a number of outstanding issues, including the amount and pricing, when negotiations ceased. The Debtors re-engaged in DIP financing discussions with Delta in the beginning of March 2012.

[PlanMaestro]

Sounds like Delta playing the only game they know, hardball.

[MYDemaray]

If anyone wants detailed color on how dependent PNCL is/was on their flying partners, what  screw-up job the Mesaba merger was and how their contracts were flawed, read Spanjers declaration. It reads like a "Deals from Hell".  Glad they are rejecting Trenary's consulting contract.  This reads like the conference call you always WANTED to a management team to hold, but never will b/c they are too trained to spin:

http://dm.epiq11.com/PinnacleAirlines/Document/GetDocument/1726835

[mloub]

The real question in my mind is how much of an unsecured claim Delta and United would have for Pinnacle's rejection/modification of their CPA's.

 

In 2005, when NWA went into Chapter 11, and ultimately modified PNCL's CRJ 200 CPA, PNCL was awarded an almost $300million unsecured claim. Similarly, when Frontier (Menke's former employer) went into Chapter 11, Republic received a $150million unsecured claim for having their contract with Frontier rejected. That $150 million unsecured claim was in large part how Republic won out in the bidding against Southwest to take over Frontier - and it is worth remembering the Frontier's equity was wiped out in that reorganization.

 

I have no idea how the damages for these unsecured claims were calculated - I haven't bothered to sift through the bankruptcy dockets to find out - but they are substantial, and are not being accounted for in many of the analyses that give PNCL anywhere from $50-$150 in equity value. If Delta or Continental receive large unsecured claims as damages for the rejection/renegotiation of their long-term CPA contracts, current PNCL equity holders would get nothing.

 

M.

 

[PlanMaestro]

Quote:

 

Of the total $16 million deferral, approximately $5 million was attributable to financing charges associated with CRJ-900 aircraft flown for Delta, and Delta took the position (which the Debtors disputed) that it was not contractually obligated to reimburse the Debtors for the deferred aircraft expense because it had not been paid to EDC. Moreover, EDC indicated that it would not agree to further payment deferrals unless the Debtors reached a long-term Q400 agreement with United, which proved unattainable for the reasons discussed above.

[PlanMaestro]

Guideline of the restructuring plan. It looks like both Delta and Pinnacle are after union concessions to make this work. Delta does not want any resets.

 

DELTA: The DIP contains a number of milestones, including delivery of an acceptable long-term business plan and achievement of certain cost savings through negotiated settlements with the Debtors’ labor unions or a Section 1113 proceedings. Upon satisfaction of certain specified conditions, Delta has agreed to convert the DIP financing into a 5-year exit financing facility.

 

1. Delta and the Debtors agreed to an orderly five-month wind-down of certain CRJ-900 flying, beginning in January 2013. 2. Delta and the Debtors have agreed that Delta will have an allowed unsecured claim for its damages relating to the modifications to the CPA governing such CRJ-900 flying, including the early termination of such flying, in an amount to be determined by the Bankruptcy Court.

3.  Under the other CPA governing CRJ-900 flying, Delta and the Debtors agreed to modified rates and the elimination of the 2013 rate reset and pilot rate reset.

4. With respect to the CPA governing CRJ-200 flying, Delta and the Debtors agreed to modified rates and margin, elimination of the 2013 rate reset and pilot rate reset, and extension of the term of the CPA by four and a half years until 2022.

 

UNITED: As the Q400 aircraft are removed from service, they will be abandoned to EDC, in exchange for EDC’s waiving any administrative claims and limiting its deficiency claim on account of the Q400 aircraft and United’s providing certain cash and other consideration.

 

EAS: The Debtors are still parties to certain EAS agreements with the U.S. Department of Transportation, covering a small number of Saab 340 aircraft flown for US Airways and United. The Debtors intend to terminate this flying by July 2012.

 

[AAOI]

Guys, if any shareholders are interested in getting in touch with a friend who is putting together the equity committee let me know. Not a shareholder myself, but I'm honestly tempted to a deep dive here given their seems to be a fair amount of downside protection and the upside could be 10x or more under various scenarios. 

 

That said, Delta appears to hold all the cards here (and appears to be a terrible partner in general) so one has to be very careful. The downside protection could be a mirage of course (although I havent done the work to have a real opinion) and Delta seems completely focused on reducing their operating costs at all costs (i.e. to the detriment of their partners) - but then again, they've pre agreed to exit financing so one could conclude they have zero interest in converting their debt to equity.

 

Seems hard to get an edge on this one, so maybe this goes in the too hard pile. If anyone has a rational walk if you will that could highlight a scenario where the equity would be completely wiped I'd love to hear it.

[MYDemaray]

Question for the board:  Is it possible to end up with negative book value in Ch 11, but still have equity holders emerge in tact?

[twacowfca]

Question for the board:  Is it possible to end up with negative book value in Ch 11, but still have equity holders emerge in tact?

 

The equity is usually toast unless the creditors want to give them something for some obscure reason.  Does Delta control the lowest class of debt, the unsecured creditors?  If so, they may want to throw equity a bone.  If not, lots of luck.  However, if there are no substantial unsecured creditors other than Delta, this could be a quick roundtrip like a prepack with more than a bone left for equity.  Are there preferred securities that come ahead of common?

[MYDemaray]

That aside, has anyone ever heard of a negative book value situation leaving equity in tact?  I'm not trying to hold out hope here...I have no position.  This is more of a theoretical.

[twacowfca]

That aside, has anyone ever heard of a negative book value situation leaving equity in tact?  I'm not trying to hold out hope here...I have no position.  This is more of a theoretical.

 

Yes, equity of an insolvent debtor (not enough value to completely pay off all creditors) may sometimes get a very small amount of reorganized stock or warrants when there is malfeasance by the creditors that could allow equity to throw a monkeywrench into the confirmation of a POR. 

 

This Cpt11 looks like management is doing whatever Delta wants.  Under the absolute priority rule, the unsecured creditors or preferred holders usually object if a class below them in the mandated order of priority is proposed to receive anything if the classes with higher priority have not been paid off in full including back interest.

[PlanMaestro]

Question for the board:  Is it possible to end up with negative book value in Ch 11, but still have equity holders emerge in tact?

 

Michael, where did you read that Pinnacle has negative equity ( think the announcement came with around $100m of equity)? Have you found the projections?

[twacowfca]

Question for the board:  Is it possible to end up with negative book value in Ch 11, but still have equity holders emerge in tact?

 

Michael, where did you read that Pinnacle has negative equity ( think the announcement came with around $100m of equity)? Have you found the projections?

 

 

They seem to be trying to get rid of leases and other contracts and obligations.  Most of these  would then become unsecured claims against the Debtor.  Is there any reason to believe that those obligations would not wipe out the equity?

[PlanMaestro]

They seem to be trying to get rid of leases and other contracts and obligations.  Most of these  would then become unsecured claims against the Debtor.  Is there any reason to believe that those obligations would not wipe out the equity?

 

The core of the reestructuring plan is about negotiating with the labor unions. Most of the changes of the Delta contract are to their disadvantage. Why stopping rate increases in favor of Pinnacle would generate an unsecured claim against it? The unsecured claim mentioned seems to be about the CJ-900 where my understanding is that they are losing money. Overall, they are cash flow positive.

[twacowfca]

They seem to be trying to get rid of leases and other contracts and obligations.  Most of these  would then become unsecured claims against the Debtor.  Is there any reason to believe that those obligations would not wipe out the equity?

 

The core of the reestructuring plan is about negotiating with the labor unions. Most of the changes of the Delta contract are to their disadvantage. Why stopping rate increases in favor of Pinnacle would generate an unsecured claim against it?

 

 

I haven't studied this because it dosen't look that great superficially.  Don't they have leases on types of airplanes that have turned out to be less than desirable? 

[PlanMaestro]

I haven't studied this because it dosen't look that great superficially.  Don't they have leases on types of airplanes that have turned out to be less than desirable?

 

It is more complicated than that. Delta owns those planes, not Pinnacle that has a contract to operate them. I do not have a position, just looking how it develops.

[17thstcapital]

They seem to be trying to get rid of leases and other contracts and obligations.  Most of these  would then become unsecured claims against the Debtor.  Is there any reason to believe that those obligations would not wipe out the equity?

 

The core of the reestructuring plan is about negotiating with the labor unions. Most of the changes of the Delta contract are to their disadvantage. Why stopping rate increases in favor of Pinnacle would generate an unsecured claim against it? The unsecured claim mentioned seems to be about the CJ-900 where my understanding is that they are losing money. Overall, they are cash flow positive.

 

My read is that there could be at least 3 separate potential unsecured claims against the estate from the company's partners.  1) from EDC for any deficiency on the aircraft returned to them.  2) from United for termination of their CPAs.  3) from Delta for agreeing to modify their CPAs.  Probably too early to get a good handle on the size of these claims.  My early sense is that pre-petition equity ends up sharing ownership of restructured PNCL with the general unsecured creditors and the unions.  With the current market cap at ~$10mm, market is basically suggesting that GUC/unions takes the company with little to no value shared with pre-petition equity. 

 

Not involved (long RJET) but following closely.

[actuary]

Looks like Pabrai recently sold some shares, while the activists bought more. Also, Menke has resigned.

 

http://phx.corporate-ir.net/phoenix.zhtml?c=131072&p=irol-sec

[prunes]

Have any of you been following this further? An activist shareholder has taken the lead in forming an equity committee and has filed a motion to reject the proposed DIP financing.

 

The link to the objection is here: http://dm.epiq11.com/PinnacleAirlines/Document/GetDocument/1735210

 

The judge pushed back the DIP hearing, previously scheduled for April 25, to May 16.

[actuary]

Good conversation about the same activist (Morris) going on in the General Discussion forum now. He recently gained control of the INFU board - increases my subjective assessment of his probability of success with PNCL. DIP adjournment is a small victory... Morris doesn't need to salvage much of that equity sliver for tickets to pay out nicely here.

[Ballinvarosig Investors]

Pinnacle has plunged 45% today. Smells like someone knows the outcomes of the court proceedings tomorrow.

[Sportgamma]

Anyone informed about the outcome of today's proceedings?

[Ballinvarosig Investors]

Anyone informed about the outcome of today's proceedings?

I read that the company has handed over assets that have equity value (Q400 planes) to Republic Airlines for nothing just to get out of the repayment obligations.

 

http://www.ainonline.com/aviation-news/2012-05-15/republic-agrees-take-over-q400-flying-pinnacle

 

I have no idea why anyone would want to get involved with Pinnacle. When you are leveraged so highly, it only takes for a small hit or impairment to the asset side for you to be wiped out.