Sifting Through Eastern's Rubble

In its last years, Eastern Air Lines lost millions. But now that Eastern is in liquidation, Charles Lemonides, who analyzes distressed securities for Gruntal, thinks there are some profits to be had in the dead airline.

Lemonides likes Eastern's 2nd Priority Secured Equipment Certificates, which trade on the American Stock Exchange. He says the certificates are a steal at the recent price of 65. That's $650 for a certificate with a $1,000 face value. Lemonides thinks investors should realize a return on investment anywhere from 57% to 112%. The payoff could come in 10 to 26 months, he says, depending on how fast the trustee can sell the planes that are the security for the certificates.

There's $168 millon in certificates at par, but that's only $109 million at today's market price. What's backing them now is $50 million in cash and 58 aircraft, which suggests a value of less than $1 million per plane. Even though the used-aircraft market is hardly robust, Lemonides argues that the price is too low. "The engines alone are worth $500,000 each," he says.

Consultants asked by the analyst to value the planes came up with $263 million. To be conservative, Lemonides figures the planes would fetch half that. He also allows $20 million for maintenance. That leaves $111 million. Add the cash plus interest earned on the cash, and he comes up with $169 million, or $1,020 for a certificate selling for $650. If the planes sell for 75% of their estimated value, the certificates could be redeemed at $1,380.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE