I was inspired to write this article by another article I read on Republic Airways Entitled: Republic Chapter 11 Stay away or get in short before it trades for pennies. After reading this article I began my research and reviewed the bankruptcy documents.
Most investors assume that every bankruptcy is the same and that the common stock holders will be wiped out, this assumption is made without looking at the balance sheet, which is the ultimate determining factor of a company's solvency.
Based on a the balance sheet and the new Delta Air Lines settlement, RJETQ is an incredible investment such as other Bankrupt companies who's stock price rose significantly during bankruptcy and astronomically after bankruptcy, companies such as Uhaul, Alexander's, General Growth Properties and more recently, American Airlines.
The RJET common shareholders will not be wiped out, because as of the time of the bankruptcy, the company has $590,000,000 in shareholders equity with 50,948,147 shares outstanding equating to roughly $11.50 a share in liquidation value (doc 4 pg 60). The company has $132,000,000 in cash & cash equivalents which equals $2.60 a share in cash. Republic airways is currently trading for less than the cash on its books.
Special Situation Investing (Litigated Matters)
I look for opportunities in which solvent companies file bankruptcy, although this is rare, when it occurs the returns are incredible because very few investors look at the balance sheet of a company in bankruptcy.
I have 20 years experience working as a consultant for debtors and creditors in complex bankruptcy cases, in early 2008 I decided to expand and use my knowledge about bankruptcy to find and invest in stocks and/or bonds of solvent companies in bankruptcy that were trading at prices below their liquidation and/or restructure value.
In 2009 I came across General Growth Properties bankruptcy and during my research I found presentation Bill Ackman gave on GGP at the Ira Sohn Conference, he made the case that although in bankruptcy the common stock had significant value, I invested and to date (with Spin-offs of Howard Hughes Corporation and Rouse Properties and dividends)
Reasons for Republic's Chapter 11
a) A lawsuit filed by Delta seeking over $1,000,000,000 in damages for breach of contract etc.(doc 244 pg 28 at 54)
b) A growing national pilot shortage of qualified pilots in the United States, primarily as a result of Congressional legislation enacted in 2010 which became effective in August 2013 and January 2014, page 244 pg. 12 paragraph 17 reads:
The pilot shortage made it increasingly difficult to maintain the necessary pilot staffing levels to sustain reliable performance requirements under the Codeshare agreements with codeshare Partners. As a result of the pilot shortage, Republic has been forced to ground operating aircraft and reduce scheduled flying for each Codeshare Partners and the shortage is driving significant increases in cost of collectively bargained wages, benefits, and work rules for pilot labor, which adversely affected Republic's financial position and cash flows and operations.
c) An expired collective bargain agreement and dispute with the pilots union (resolved pre-bankruptcy)
d) The need to return or settle with owners of the out of favor aircraft (Q400 and ERJ-145)
e) Streamline operations by operating under a single aircraft type (E170/175) and under a singled operating certificate
e) Lack of liquidity to fund future operations and growth
Republic's restructure plan and progress the first 30 days after the petition was filed
Republic Airways filed bankruptcy on February 25,2016 and within 30 days they have accomplished 90% of the issues that caused their bankruptcy, the disclosure statement is due by June 15, 2016.
1) The Delta lawsuit was resolved on March 24, 2016 (doc 244) the hearing to approve the agreement between the parties is April 14, 2016.
a) The amended Codeshare agreement allows Republic to secure higher labor costs resulting from the new pilot labor agreement ratified in October 2015 (doc 244 pg 17)
b) Delta agreed to a $170,000,000 unsecured claim instead of the 1 Billion dollars in damages they sought in the litigation (doc 244 pg27)
c) Regarding liquidity: Delta agreed to provide the debtor up to $75,000,000 in post-petition financing (doc 244 pg15)
The major shareholders have not sold and are well represented by the same legal counsel
Of the 50,000,000 in outstanding shares roughly 20,000,000 of those share are held by seven funds. (doc 286)
1) Axar Master Fund Ltd: 10,115,000 shares of Common Stock
2) Man GLG Select Opportunities Master LP: 3,118,728 shares of common stock
3) Trishield Capital Management LLC and certain of it's managed funds and accounts: 2,531,863 shares of common stock
4) Quantum Partners LP/ Soros Fund Management LLC: 2,000,000 shares of common stock
5) Drawbridge Special Opportunities Fund Ltd: 500,865 shares of common stock
6) Drawbridge Special Opportunities Fund LP: 1,842,860 shares of common stock
7) Worden Master Fund I LP: 56,275 shares of common stock
When 40% of the holders of a bankrupt company's common stock is still held by large holders after 35-40 days into the bankruptcy this is a good sign that the shares of the solvent company have value, these Republic shareholders are represented by the same legal counsel and will assure that all common shareholders are properly represented (doc 286)
The uncertainty of the outcome of the Lawsuit filed by Delta is over, and therefore the value of this stock can be better ascertained, the value of RJETQ was contingent on the outcome of this lawsuit.
Benjamin Graham, the Author of "Security Analysis" and the "Intelligent Investor" spoke of Special Situations in litigated matters in the fourth quarter of the 1946 financial analyst journal, he wrote:
" There are fairly numerous cases in which the value of a security depends largely on the outcome of litigation. This may involve a damage or subordination suit (e.g., International Hydro Electric, Inland Gas Co.); disputed income tax liability (e.g., Gold and Stock Telegraph, Pittsburgh Incline Plane); an appeal from a reorganization plan wiping out stock issues (e.g., St Louis Southwestern Ry., New Haven R.R.). In general, the market undervalues a litigated claim as an asset and overvalues it as a liability. Hence the students of these situations often have an opportunity to buy into them at less than their true value, to realize attractive profits-on the average-when the litigation is disposed of.
In the case of Republic Airways the risk of a protracted litigation or a huge judgment is over, post-petition financing of $75,000,000 is secured, they have agreed to an amended agreement with Delta Airlines which will pay them hundreds of millions in increased revenue, the $1,000,000,000 in damages sought has been reduced to an unsecured claim of $170,000,000 dollars, this appears to be a classic Benjamin Graham special situation with a huge upside, this stock was trading in the $14 dollar range in April 2015 and is now trading at roughly $2 a share with $2.60 a share in cash & equivalents creating a huge margin of safety.
Republic has over 1,000,000,000 in net operating losses that can be used to offset future taxes, or carried back for tax refunds. Bankruptcy doesn't always mean broke, investing in the common stock of a solvent company in bankruptcy is a great way to earn better than average returns. I am Long RJETQ.
Disclosure: I am/we are long RJETQ.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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