On Monday, Spirit Airlines (SAVE) announced that the company would be filing for Chapter 11 bankruptcy.
In the announcement, the company also indicated that a supermajority of the company’s bondholders had signed off on a prearranged restructuring plan that would bring in $650 million of additional financing ($300 million in future equity and $350 million of debtor in possession financing), which will allow operations to continue through the bankruptcy process.
Unfortunately for shareholders, Spirit Airlines stock was halted for trading and is pending delisting, with no expectations of any recovery for equity holders.
Quoting from the firm’s announcement:
As a result of the chapter 11 filing, Spirit expects to be delisted from the New York Stock Exchange in the near term. The Company expects that its common stock will continue to trade in the over-the-counter marketplace through the chapter 11 process. The shares are expected to be cancelled and have no value as part of Spirit’s restructuring.
So, if you own shares of Spirit Airlines, is it possible that you could recoup any value?
Short answer, yes, but it’s unlikely to be much.
To explain why, let’s look at how bankruptcy works for publicly traded companies.
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How Bankruptcy Works, and Why You Shouldn’t Expect Much from Spirit Airlines Stock
When a company files for Chapter 11 bankruptcy there’s a hierarchy for recovery.
The bankruptcy proceedings prioritize repaying secured creditors first. In practical terms, that would mean a loan that’s secured by equipment, buildings, inventory, etc.
After secured creditors come “priority claims” like employee wages and administrative costs.
Then you’ve got unsecured creditors—bondholders—whose claims are prioritized based on the seniority of the debt they hold (determined when the debt is issued).
Last in the line for recovery are equity holders, with preferred stock being prioritized over common stock.
If a company takes on debt to carry them through the bankruptcy process (known as debtor in possession financing) those lenders actually jump to the front of the line, ahead of even the preexisting secured creditors.
As you may have surmised, given their position in the hierarchy, common stockholders don’t typically recover much during bankruptcy proceedings, with some studies finding shareholders only recoup 2-7% of their original investments.
Given all of that, why is there any case for Spirit Airlines investors to claw back any value from shares?
In a word, speculators.
As the release acknowledged, shares of Spirit will be delisted and begin trading over the counter (OTC) under a new ticker symbol at some point in the future.
They’ll likely be trading significantly below the 1.08 price that shares closed at on Friday before the bankruptcy announcement, but they will trade.
Spirit itself has acknowledged that the shares are expected to “have no value,” but it’s quite common for speculators to buy shares in bankruptcy hoping for the possibility of a recovery.
We saw the same thing happen with Yellow (YELLQ), the trucking company.
Yellow filed for bankruptcy in August of 2023, but equity investors and hedge funds bid up shares on the belief that the hard assets owned by the company would ultimately fuel a recovery for equity investors.
You can see the impact on the bankrupt shares in the chart below.
Equity investors’ hopes were dashed earlier this year, however, when bondholders rejected proposed terms that may have allowed for some recovery for shareholders (you can see it in the sharp drop-off in the chart above in September).
To be abundantly clear, investors should not expect anything close to that kind of recovery for SAVE shares.
Spirit’s proposed bankruptcy plans already have buy-in from a supermajority of debt holders, and Spirit doesn’t own the kind of liquid hard assets that could be easily sold off in bankruptcy (at least not if they’re planning on running an airline and coming out the other side) that Yellow had.
But, until the bankruptcy is finalized and outstanding shares are canceled, there will remain investors willing to bet on an alternative rescue plan materializing.
If you do own shares of Spirit, once they begin trading again, you’ll be presented with two options: Sell the stock OTC for whatever speculators are willing to pay or continue to hold shares in the hope that a white knight rides to the rescue with a bankruptcy plan that’s far better than anything Spirit itself could negotiate with its creditors.
We won’t know how much speculators are willing to pay until shares resume trading, but it’s likely to be pennies on the dollar.
So, yes, while you may be able to recover something if you own SAVE shares, it probably won’t be much.
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