Replies to post #74 on Bankrupt and Distressed (BAD) Research and Due Dil

[Madclown]

MESAQ lease rejection estimation

The following statement comes from the article linked at the bottom of the page

“11 U.S.C. 502(b)(6) fixes the damages that may result when a debtor-tenant rejects a lease. The lease rejection damage claim is calculated based on the remaining term of the lease and is limited to the greater of the rent reserved for (i) one year or (ii) 15 percent of the remaining lease term, but no more than three years…”

Here is a back of the napkin calculation on what the obligations under the rejected leases might be assuming they would be responsible for 3 years worth of lease payments. Bear in mind I looked at this a few months back so I have not followed the case for a while. It is a very rough sketch at this point. I cannot find in the 10-k or any 10-q's where the company breaks out its lease expenses into its constituent components but it does appear that the lease expense is included in "Flight Operations." I necessarily make some assumptions below and have not accounted for any related benefit they would receive, expense wise, from the plane rejections. The amounts below are in millions.

($80) Quarterly Flight Operations costs (per 06/30/09 10-Q)
($64) 80% assumed to be lease related
($256) Annualized lease expense
($85) Rejecting 1/3rd of leased fleet (about 50 planes)
($256) 3 years worth of obligations on rejected leased fleet

So the estimated claims on lease rejection under this estimate would be about $250 million. Based on this estimation the company will have to negotiate a much better deal than the standard 3 years worth of obligations in order to preserve value to equity even if they win the Delta lawsuit. I encourage anyone/everyone to shoot holes in the assumption so we can get to the actual numbers.

Link to Lease Rejection Article:
http://www.lowenstein.com/files/Publication/608edb76-c593-4610-90b3-19eb24d3e1bb/Presentation/PublicationAttachment/d4d398f1-4e13-4653-90c6-1d6650fda49a/NJLJ%20-%20IL%20&%20BB%2002-04-02.pdf

[Madclown]

In looking at the last 2 MORs, MESAQ looks to have EBITDA of $9.8 million for those 2 months. This would project out to be $58.6 million on an annualized basis. Now apply a generous multiple of 8 times (current multiple for non bankrupt competitor RJET) and the EV would be $469 million. This also happens to be the reported EV on Yahoo finance as of 04/15/10.

With total liabilities of $850 million which includes liabilities subject to compromise of $536 million, the EV of $469 million just doesn't quite get there even with a generous multiple. Keep in mind that these numbers don’t reflect the lease rejections claims that are currently “off balance sheet”. Still worth watching to see how the future MORs might shape up but I don’t think the prospects are as favorable as a PGPDQ, GGP, CEMJQ, or TRXAQ situation.