It’s buried in the Schedule 14A Proxy filing with the Securities and Exchange Commission and the language is in code, but Mesa Air Group paints a dire financial picture as it solicits shareholders to sharply increase outstanding shares in order to redeem convertible debt for $37.8 million due 16 June.
Here’s a summary of relevant facts:
• Mesa in June 2003 issued $100m in notes due 2023, which are callable by this June.
• Mesa may pay off the notes in stock but otherwise will be required to pay cash. The payoff may also be in a combination of stock and cash.
• At December 31, the last financial period reported, Mesa had $97m in unrestricted cash with another $91m posted as bond in the Hawaiian Airlines lawsuit it lost (and which is on appeal). A second lawsuit in pending by Aloha Airlines, which has ceased operations. This lawsuit, similar to the Hawaiian case, may be pursued by the bankrupt estate.
• Mesa has been trying to finance $100m in spare parts, hoping for 50 cents on the dollar, but as far as is known, no deal is pending.
• Mesa has reported poor traffic figures during the March quarter which lead to the conclusion that it will post a loss for the period. Mesa doesn’t have to report its March results until May 15 or 16, which is after the May 13 shareholders’ vote on issuing new shares to redeem the notes. Mesa may report earlier.
• Mesa was notified last week that Delta Air Lines plans to terminate Mesa’s Embraer E-145 jet service arrangement, which will mean a loss of more than $240m a year in revenue. For the fiscal year ended 30 September, Mesa’s revenue was $1.3bn. Mesa denies Delta’s assertion that Mesa’s performance fell below contract standards and has sued Delta to maintain the business.
• Mesa cannot issue new shares exceeding 20% of the outstanding number (26.89 million), or 5.37 million, without a shareholders vote. With the stock price closing yesterday (8 April) at $1.32, this means Mesa would have to redeem the notes with at least $30m in cash in addition to the new shares.
In the event Mesa doesn’t get shareholder approve to issue enough shares to redeem the notes, here’s where the dire language in the proxy kicks in.
“A requirement to fund such amount in cash would have a material adverse effect on the Company’s financial condition.”
Also: “If the Company does not have adequate cash resources to make any required cash repurchases of Notes in the event it does not receive shareholder approval to issue additional Common Stock, the Company may not be able to satisfy its Note repurchase obligations, in which case the Company could be in default under the Indenture and the Company’s business and operations could be materially adversely affected.”
And: “There can be no guarantee that the company would have adequate cash resources to satisfy the remainder of its Note repurchase obligations when they become due. Any such failure to have the ability to issue shares or have adequate cash could result in a default under the Indenture.”
All this legalese is clear warning that Mesa’s financial condition is on the brink.
This puts shareholders in a major predicament. They can vote to increase the shares and be dramatically diluted, risking that a bankruptcy filing could be forthcoming anyway because of the poor financial condition of the company; or they can refuse to authorize new shares and almost certainly invite a bankruptcy filing.
Mesa CEO Jonathan Ornstein owns 7% of the outstanding shares, making him the sixth largest shareholder. Five institutional investors own 46.3%.