Northwest Airlines' bank debt traded up a point to 100 after the airline filed for bankruptcy last week. The price was buoyed by investors' expectations that its reorganization through Chapter 11 will restore profitability. "Banks expect the airline to come out of its restructuring with fully performing debt," said one trader. Northwest's short-term bonds fell about eight points on average. Its 9.875% '07 bonds fell 7 points to 27, while its 10% '09 bond fell 9 points to 25.
Both Northwest Airlines and its ailing competitor Delta Airlines filed for bankruptcy on Wednesday last week. Unlike Delta Airlines, Northwest has not sought debtor-in-possession financing as part of its restructuring. "The airline's unrestricted cash and short-term investments balance is $1.5 billion, which is adequate for it needs," said a Northwest spokeswoman. Delta announced it had obtained a $1.7 billion debtor-in-possession [DIP] financing from GE Commercial Finance and Morgan Stanley after it filed. The DIP financing replaces a $980 million in secured pre-petition financing from GE Commercial Finance and American Express (see related story, page 5).
Standard & Poor's said in a press release that Northwest may yet seek DIP financing while in Chapter 11. The company has a $975 million bank credit facility, which is secured by its Pacific route flights. Evan Mann, senior high yield analyst at Gimme Credit, said Northwest may not have sought DIP financing because it has no assets left to secure new financing. "Maybe that is why they filed sooner than later. If you can't get DIP financing it is better to file sooner than later so that you lose less money," said Mann.
Unsecured creditors could find themselves recovering only a small portion of their investment in Northwest. Mann said that unsecured creditors owning debt in bankrupt airlines have historically only recovered between 5 and 10 cents on the dollar. Northwest's bondholders may be able to recover slightly more, however. "They have a lot of cash on their balance sheet," he said. "If they can come out of bankruptcy, bondholders could get 15 to 20 cents on the dollar at best."
Northwest warned that it had missed payments to its creditors in its 8-K, which it filed a day before filing Chapter 11. It disclosed it had missed $23 million of payments due on aircraft-backed debt. During the first 60 days of Chapter 11, Northwest will not need to make payments on its aircraft-backed obligations. The firm also said that a $65 million pension payment would have been due last Friday. Failure to make that payment would have triggered a lien against its assets if the airline had not filed for bankruptcy.