tattikat2

Hello.
I get an email from "Stansberry & Associates" ( a financial news letter which among other things correctly stated that GM would be forced into bankruptcy about 2 years ago )
They (or the author) belives CO will go bankrupt at some point in 2010 due to the following.

CO has 105 million of equity sitting under more than 12 billion worth of debt.
It has 900 million worth of lease and capital obligations coming due this year and only 2.7 billion worth of cash left.
In 2011, 40% of its $6 billion in long term debt will come due.

However, it states that the "trigger" for CO's bankruptcy will be an obscure clause in its credit card processing agreement with Chase Bank.
It states that CO is required (by Chase) to maintain at least 25% of it's current obligations in cash.
Next year (2010), the portion of its long-term debt that's due in 2011 will come "current" - due within the next 12 months.
This , it says, will cause CO's current obligations to climb to near $7 billion.
This "collapse" of the current ratio will trigger a cascade of debt defaults, resulting in CO being pushed into bankruptcy sometime in 2010.

It states CO can do nothing to avoid a default ( current economy etc).
With only 105 million left in equity it states it is not enough to either (a) restructure its debt, (b) pay for the planes it has already agreed to buy from Boeing or (c) operate profitably long enough to repay its debts.

I am not in a position to verify this info but I am interested to hear other members thoughts as to what they think.

The author (Porter Stansberry) is recommending shorting CO's stock (to profit when it goes down, not up)

I cannot post a link as i think its for subscribers only but I've summed it up pretty tightly.

For all I know , there are many airlines that are in the same situation , however, CO is the airline named in the letter.

Thanks for any answers.

sbm12

My guess would be that Chase would simply buy more miles to infuse cash into the organization if there was a technicality that was going to trigger something like that. And, unless I'm doing my math wrong, the 25% threshold is going to be roughly $1.75Bn based on $7Bn of obligations. They've got $2.7Bn in cash now and are not hemorrhaging quite as badly anymore so I'm not sure that they will actually drop to below the magic number. I also have a lot of trouble understanding balance sheets so there's a pretty good chance I don't understand any of this.

A significant amount of the new plane debt is being delayed with the 787 delays continuing to worsen, so that is actually good for CO in that regard.

And maybe the airline will go bankrupt.

elitetraveler

He also seems to support buying gold and believe the US dollar will be more or less worthless "by the time Obama leaves office."

I guess a Meteorite could hit earth and disrupt his predictions.

http://www.dailywealth.com/archive/2...009_jun_25.asp

tattikat2

I know, I don't agree with everything they've come up with. However ,as I said they were right about GM and quite along time ago at that.

Does that mean they are right now? I do not know, but I am interested in the views of fellow members, and in particular, members of this board as I myself being a UA flyer, spend most if not all of my time on the UA board.

elitetraveler

I think all the legacy carriers are in danger. Chase has a vested interest in keeping CO afloat, but whether it behooves Chase to let CO go 11 or not I don't know. My experience (reading about these things) is that financial covenants are often re-negotiated at the 11th hour and everyone takes a haircut.

As to GM, quite a few folks have predicted its demise for quite some time.

andyli

It is also very possible that Chase and Continental will either (1) restructure the agreement rather than face BK or (2) Chase will give CO a waiver from that provision of the agreement.

Am I reading their 2008 annual report wrong? From Note 4, it looks like they ended 2008 with $5.2 billion of long-term debt, of which $516 million is due in 2009, $945 million due in 2010 and $1,128 million due in 2011.

I just don't see where they are getting the $7 billion number.

Xyzzy

If it's not Magic 8-ball it's probably something very similar.

Bernoulli 777

We have any CPA's out there? Wouild you please read CO's 10 K and give us a synopsis?

B7

JetAway

Is Chase in any position financially to help/"bail out" CO?

andyli

Chase is probably one of the healthier banks out there. They just repaid $25 billion in TARP funds back to the US Government. The government previously said they would not allow banks that may still be in financial trouble return TARP funds.

I believe they are negotiating a buyback on the preferred warrants that the US Treasury has right now, as well.

novaguy30

Even my pets predicted GM's demise. That said, this guy may or may not be correct.

elitetraveler

http://abcnews.go.com/Blotter/WallSt...7146474&page=1

I'm happy my wire transfer fees go to good use

coplatua1k

The handwritting for GM started ten years ago, they began to lease their cars below market value in a failed step to raise revenue fast and move cars. A company with a huge retirement base can not sustain itself on 30K present employees, not to mention when temporarily idling a plant means a paid vacation for its workers for months at a time.

If we continue at our present rate, the dollar may be worthless and yes CO will be bankrupt. CO will not bring itself down, politics, spending, and a down economy might. I believe you can look for UA to go first however.

dvo1029

CPA here, will read tomorrow and get back to you. By the way, to the last poster that scoffed about buying gold and the dollar being worthless, this CPA knows some people in pretty high up places and they all agree that gold will skyrocket (mainly because of our current economic policy, not just from Obama but started from Bush will cause hyper inflation). Also, we a printing dollars left and right and yes they will be worth much less a few years from now.

ijgordon

I haven't looked at the K, but my guess is that the large 2011 obligations would include leases? That said, I think in any event, there will be a tremendous focus on refinancing the 2011 obligations. Obviously it's difficult in this environment, but not impossible, and more a function of what it would cost CO to get the refinancings done. Plenty of companies in precarious situations have refinanced debt (e.g., MGM), but the terms are not particularly favorable.