Interesting article in the Wall Street Journal
UAL Prepared to Reapply for Federal Loan Guarantee
Tue Dec 9, 5:33 PM ET
By Susan Carey, Staff Reporter of The Wall Street Journal
CHICAGO -- Written off for nearly dead a year ago when it filed for bankruptcy-court protection, United Airlines parent UAL Corp. has rebounded strongly enough that two big money-center banks competed fiercely to underwrite a $2 billion financing that would allow the airline emerge from Chapter 11 next year.
People familiar with the matter said Citigroup Inc. (NYSE:C - News) and J.P. Morgan Chase & Co. (NYSE:JPM - News) in recent weeks gave UAL separate preliminary underwriting proposals.
Neither plan envisioned an injection of capital from a private equity investor, these people said. Knowledgeable individuals said today that UAL persuaded the two to work together, and plans to let J.P. Morgan lead the financing, naming Citigroup co-arranger.
"We're very pleased to be leading this financing for United Airlines and this management team," said Bill Repko, managing director and head of the restructuring practice at J.P. Morgan. The deal is expected to be signed in the next few days. Citigroup wasn't immediately available for comment.
With its lead underwriters selected, UAL now is expected to submit its revised business plan to the Air Transportation Stabilization Board as early as next week, according to people familiar with the matter. This time, the airline will ask the federal panel for $1.6 billion in loan guarantees to back the majority of the bank loan. That would be $200 million less than UAL asked for a year ago, when its business plan was rejected as risky and overly optimistic, plunging the carrier into Chapter 11.
Both J.P. Morgan and Citigroup, along with two other banks, currently are participating in an interim bankruptcy financing that has kept UAL aloft in Chapter 11. UAL never drew down more than $800 million of the $1.5 billion of that interim loan, and currently owes the four banks about $700 million, which would be repaid once it received the exit loan.
The fact that the two big banks fought to get the business independently "is a sign that people are beginning to like what they see," said one individual with knowledge of the situation.
After UAL filed for protection in U.S. Bankruptcy Court in Chicago a year ago, the company warned it might not be able to reorganize and could be forced to liquidate. But massive cutbacks in expenses and an improving revenue environment recently have boosted the airline's circumstances, leading UAL to post a third- quarter operating profit for the first time in 13 quarters.
The loan-guarantee board, set up by Congress after the 2001 terrorist attacks to help airlines avoid liquidity problems, left the door open for UAL to reapply for loan backing when it turned down the carrier. The statute that created the board lets it provide loan guarantees for an airline bankruptcy-exit loan, as it did for US Airways Group Inc. (NasdaqNM:UAIR - News) earlier this year.
But one piece of UAL's new business plan hasn't yet been settled -- pension relief.
UAL was hoping Congress would pass legislation this week that would allow it to defer payment of large sums owed to its four pension plans. UAL recently estimated it would have to pay the plans about $4.2 billion by the end of 2008 under the current rules. But late Tuesday it was unclear whether Congress would take action before adjourning for the holiday break.
The loan board a year ago raised concerns about many aspects of United's business plan, including its underfunded pension liability. Since then, the liability has decreased somewhat because UAL furloughed many workers and cut the pay and pension benefits for those who remain.
It is widely expected that Congress, if not this week then perhaps early next year, will approve a bill that would replace the 30-year Treasury bond in pension calculations with a long-term corporate-bond index for two years. That change alone would provide substantial relief to all companies with underfunded pension plans.
UAL in October asked the Internal Revenue Service (news - web sites) for waivers so it can postpone certain pension payments, contributions that currently are accelerated because the plans are underfunded. If granted in the coming months, the waivers would allow the company to push out contributions over five years from the year they were due originally.
The version of the UAL business plan that lenders looked at, and the one that is expected to go to the loan-guarantee board, foresees only modest, achievable pension relief. "United can argue that pension cash flow can only get better," said one individual familiar with the company. "The strategy is to put out a program they can beat."
Another person who has seen the plan said the assumptions "are pretty modest. It doesn't assume a big recovery. It's financeable."