ExpressJet's Cashflows, Part 2

I spoke to ExpressJet's investor-relations chief Kristy Nicholas today, in the wake of my blog entry last week about the company. She helped clarify a couple of issues:

Firstly, the 100% holdback on credit-card income isn't nearly as damaging to ExpressJet as an increase to 50% was to Frontier. ExpressJet says it's likely to have $18 million tied up in credit-card holdbacks on any given day in 2008; that's not chump change, but it's still only about 1% of the company's 2007 revenue of $1.7 billion. Most of ExpressJet's business is contract flying, mainly for Continental, and none of that business is affected by holdbacks.

Secondly, all of ExpressJet's auction-rate securities are backed by student loans, and they're all triple-A rated, for what that's worth. The company did take an $8.7 million charge against its portfolio of auction-rate securities, because when it asked some investment banks to bid on its portfolio, that was the number that came back. But so far ExpressJet has not realized any losses on its $65 million ARS portfolio, and Nicholas said that she's started to see "a little bit of traction in the last week or two," with some auctions starting to succeed again.

In the meantime, the student-loan-backed ARSs are paying very high rates of interest, on the order of 18-20%, in stark contrast to some municipal ARSs which have much lower maximum interest rates. As and when the auctions start clearing again, ExpressJet will of course sell (or not roll over) its holdings. But so long as the market remains locked up, the company is getting a healthy income on its unfortunately-illiquid investment.

None of this means that ExpressJet is out of the woods, by any means. My personal feeling is that the share price is being held up by takeover hopes more than anything else, and that the credit-card companies have good reason to be very worried about ExpressJet's counterparty risk. But give Nicholas points for imaginative spin, at least: "You hope to see your holdback percentage go up," she told me, "because that means you're selling more tickets." Nice try.

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