In the beginning of April, Pinnacle Airlines (PNCLQ or the Company) filed for bankruptcy protection in SDNY. You can find the docket here: Pinnacle Airlines Bankruptcy Docket. This afternoon, Nantahala Capital and Hudson Bay Capital Management, who collectively own approximately 2.5M shares on PNCLQ, filed an objection to the Debtors' DIP motion (Docket #138).
The document is a short, but a fascinating read into this case. While I have not yet written about the case and have yet to establish a position (I cannot reasonably quantify the Delta damages unsecured claim), I have used the case as an example of misaligned management incentives. More on this later.
The equity holders objection stems from the fact Delta being "the Debtors' most significant (and possibly only) customer, lessor of virtually all of the Debtors' assets, largest trade creditor and DIP lender..." might cause certain problems for PNCLQ and effectively give Delta every bit of negotiating power over the Company. And because Delta has all the power in the relationship, the filing goes on to point that "no other constituency has or can have any meaningful participation in these Chapter 11 Cases." And this includes the equity holders up until this point. I have heard discussions are going among between equity holders about forming a ad hoc committee and sending their issues to the U.S. Trustee and it looks like this filing is the first action we've seen on the docket from equity.
One of the more eye-popping quotes from the docket: After discussing certain payments that Delta was to pay PNCLQ as a result of their Mesaba acquisition ($18-20M), the filing goes on to say:
"On information and belief, Delta did not pay these amounts, precipitating the Debtors' liquidity crisis; and, as part of the DIP facility, these amounts are forgiven and/or compromised."For those that do not know what a "sub rosa" plan is, this document lays it out perfectly. A sub rosa plan can be related to a 363 sale or a DIP financing (like in this case). It is effectively a defacto plan disguised as a financing arrangement without all the benefits of a formal bankruptcy plan (disclosure statement, ballot, other people able to participate in one way or the the other).
While I will not get into the valuation of PNCLQ, I'd like the reader to think about who, other than Delta, this plan benefits? Does it benefit the shareholders? The price action of the stock suggests otherwise. Let's look at the management team's holdings as of the filing date.
- CEO: Sean Menke: 132,782 of 19,221,312 shares outstanding: 69 basis points
- COO: John Spanjers: 13,711 shares or 7 basis points
- General Counsel: Brian T. Hunt: 100,424 shares or 52 basis points