Eric--
Re: Atlas debt load
My take on it is something akin to my home mortgage. On paper, I owe many years of salary on my mortgage, but I can sleep soundly knowing that if we really get in trouble, I can sell the place to a willing buyer. In analogy, Atlas' debt is secured by a reasonably liquid asset, in contrast to much corporate debt which is tied up in capital for the particular business, with its value tied closely to the business being a solvent concern. Granted, not all the debt is in equipment trust certificates, and liquidating 28 747s at once would be a disaster, but overall I think it is a good way to leverage the business.
Speaking of equipment trust certificates, I recently bought the original edition reprint of Graham and Dodd's Security Analysis, which discusses equipment certificates as a special case of bonds. Graham was particularly talking about such bonds covering the locomotives of a railroad, but the scenario easily generalizes to the 747s of a modern cargo airline. The idea is that, even if these bonds do not enjoy highest seniority among the outstanding debt of the company, they hold the most secure place. It is in the best interest of any senior bond holders to allow the company to continue paying interest on the locomotives to prevent foreclosure (a credible threat given the liquidity of the engines), and enable the locomotives to continue to generate revenue. After reading this, I remembered how Atlas had at the time outstanding equipment certificates on their aircraft paying 12.25%. I went looking for how to invest in such bonds, but found out that they were being redeemed, and anyhow they were placed privately and not available for general sale. The relevant references are at the bottom of this post. As stockholders, retiring such expensive debt is good news.
By the way, this version of Graham and Dodd is a terrific read, and their reminiscences of the recently ended bull market of the roaring 20s is eerily appropriate to today's market: fundamental analysis was out the window, speculation was rampant, overemphasis on potential future earnings growth, and then the crash of 1929-32 came along to sober everyone up. It is part of the reason I am keeping a large pile of cash handy, and why I am not willing to jump right in even on Atlas since I suspect even lower prices will be available in the forseeable future.
Last note: the press release below states that Atlas will be taking $0.24 in non-recurring charges for 1Q99, for this retirement of debt ($0.20) and for changes in accounting rules ($0.04). Good to keep in mind for when earnings come out.
Oliver
atlasair.com
Golden, Colorado - January 19, 1999
Atlas Air, Inc. (NYSE:CGO) announced today that it redeemed in full its
12.25% senior secured notes due December 1, 2002 at a redemption
price of 108.00% of principal, plus accrued interest to January 19, 1999.
"The redemption of this debt is another positive move towards improving
Atlas Air's balance sheet and reducing costs," said Stephen C. Nevin,
Chief Financial Officer. "Three Boeing 747-200 freighter aircraft that
were secured by these notes will be released from such encumbrances
and Atlas will save in excess of $12.2 million per annum of associated
interest expense."
The Company expects this early debt redemption to result in a first
quarter 1999 non-recurring net after-tax extraordinary charge of
approximately $6.6 million, or approximately 20 cents per fully diluted
share, adjusted for a 3-for-2 stock split previously announced by the
Company for stockholders of record on January 25, 1999. |
