Riverhawk Aviation, Inc. (fka RHWA)

[skunksyard]

interesting read/airline financing...

http://biz.yahoo.com/rf/030530/airlines_financing_1.html

Reuters
US airlines embrace convertible debt to raise cash
Friday May 30, 1:59 pm ET
By Meredith Grossman Dubner


CHICAGO, May 30 (Reuters) - With huge expenses and limited financing options, more and more U.S. airlines are turning to convertible bond sales to raise much-needed cash.
Investor appetite for convertible debt has picked up recently, boosted by the end of the war in Iraq and lessening worries about airline bankruptcies. The mood marks a shift from an environment where airlines were unable to raise money by selling unsecured paper backed only by their promise to repay.

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"The convertible market is pretty hot right now," said William Warlick, airline analyst at credit rating agency Fitch Ratings (News). "It's one of the few vehicles for financing that the major airlines can still use."

Convertible bonds -- stock-bond hybrids that usually offer current income and can be converted into company stock -- are also popular because interest rates are at record lows and stock prices are rising. The latter makes companies less fearful that by selling convertibles they might eventually have to issue shares at prices they consider too cheap.

At least four airlines have sold convertible bonds this year, including Alaska Air Group (NYSE:ALK - News), AirTran Holdings Inc. (NYSE:AAI - News) and Northwest Airlines Corp. (NasdaqNM:NWAC - News). This week, Delta Air Lines Inc. (NYSE:DAL - News) sold $300 million of 20-year bonds that can only be converted to stock if Delta shares more than double in price.

"You've had a firming equity market ... and a little more optimism on the part of the investors that the shares might ultimately be worth something," Warlick said.

Spokespeople for several airlines declined to comment on how convertibles fit into their financing strategies.

ASSETS ALREADY TIED UP

Convertibles are a departure from the usual way airlines raise money -- by pledging their aircraft as collateral. Issuing new stock is out of the question because few investors would want the risk and the value of existing shares would be diluted immediately.

"They obviously need to raise cash to provide some stability in a difficult operating environment," said Joel Denney, fixed-income airline analyst at US Bancorp Piper Jaffray. "Most of them have already fully leveraged their collateral as much as possible, so now it's, What's next?"

In the late 1990s, airlines financed equipment using Equipment Trust Certificates (ETCs) and Enhanced Equipment Trust Certificates (EETCs), or debt backed by aircraft. With fewer new aircraft being delivered now, airlines have tried raising money by offering secured bonds backed by less attractive assets such as spare parts or aging airplanes.

Analysts said some carriers might also choose to sell assets and spin off subsidiaries. But airlines are more keen to save billions of dollars a year by dramatically cutting costs, such as by negotiating lower pay with unions.

"Long term, you can't just keep raising more money or selling assets to cover losses," Denney said. "You have to stop the losses."

F. Barry Nelson, who helps run a convertible fund at Advent Capital Management in New York that bought Alaska Air and AirTran convertibles, said a window has opened for riskier corporate borrowers to sell convertibles. The last cycle of airline convertibles occurred in the mid-1990s, he said.

But Nelson was hesitant to suggest that the rush of convertible sales means the airline industry's prospects have improved.

"What we're just generally seeing is an appetite for higher risk, higher yielding bonds -- an appetite that was conspicuously absent for several years," he said. "It more reflects market conditions being much more receptive to lower grade credit, rather than any peculiar enthusiasm for airlines."