Special Situation: Frontier Airlines

Frontier and its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code on April 10, 2008 because FirstData, its credit card processor, decided to increase its withholding to 100% from 50%. Naturally, this pushed Frontier into bankruptcy and no other merchant banks would give them a new deal. Since getting bankruptcy protection, it has finished much of its reorganization but is still looking for exit financing.

The exit or catalyst for a speculator in this de-listed stock is a financing deal that would allow the company to emerge from bankruptcy. If the S&P holds up from around 850 and Q2 earnings are stable, this could be something that happens before the new deadline of October 9th, 2009.

In the worst case scenario, the common stock goes to zero and the speculator loses the entire investment. In the best case scenario, they get financing and a survivable airline with $1B in revenues is bought for $18M. What is an airline with $1B in revenues worth? AirTran has $2.5B in revenues and a market cap of $630M. Extrapolate this to $250M and cut it in half to make room for the ongoing baggage that could follow the company for years after restructuring and you end up with a potential market cap of $125M just based on the announcement of a financing deal and emergence from bankruptcy. This would represent a 600% return with a "strike" date sometime in 2009.

In researching Frontier I discovered a potential gem in Republic Airways Holdings, which provided the debtor-in-posession financing.