Northwest Airlines came to market last week with its $1.225 billion debtor-in-possession facility, straight into the teeth of a strike threat from its flight attendants and a foiled terrorist attack that caused hundreds of flight delays and cancellations. The timing is less than perfect. "I can't believe they are coming to market right now with the strike," said one investor looking at the deal.
The airlines' flight attendant union gave a 15-day strike notice on Aug. 1 after rejecting a second tentative contract with $195 million in concessions, including cuts to wages and medical benefits, and changes to work rules the airline said are necessary to get out of Chapter 11. Last Monday, Citigroup, JPMorgan and Deutsche Bank launched a $1.225 billion DIP for the airline. There will be no strike activity before 10:01 p.m. tomorrow.
Northwest Airlines and union representatives met with U.S. Bankruptcy Judge Allan Gropper Aug. 9 to discuss a restraining order that would prevent flight attendants from the planned strike. The judge said he would make a ruling at a later date, which some believe could be as soon as today. A Northwest spokesman did not have a timeframe for when a decision would be made and declined to comment on whether Northwest was concerned about how the strike would affect the DIP financing.
The $1.225 billion financing is structured as a 24-month DIP facility that can be converted into a five-year senior secured exit facility when Northwest emerges from Chapter 11. The deal consists of a $250 million revolver and a $975 million term loan, amortizing at 1% per year. Pricing is LIBOR plus 2 1/2% on both tranches, but can be increased to LIBOR plus 3% if collateral coverage rises above 1 3/4 times, according to a filing with the Securities and Exchange Commission. Commitments are due Aug. 17.
Thursday's foiled terrorist attack in London should not have much affect on Northwest's financing, according to an investor. "It's something that lenders can throw back at Northwest," he said, but noted he didn't believe it would cause much of a problem based on reports from the ratings agencies. Standard & Poor's said British Airways could feel the most immediate impact because its main hub is Heathrow Airport, as well as the principal U.S. airlines serving London airports: American Airlines, United Airlines, Continental Airlines and Delta Air Lines.
Northwest's financing is secured by Northwest's Pacific routes, according to the SEC filing. The airline has extensive "fifth freedom" rights that allow it to operate service from any gateway in Japan to points outside the country and carry Japanese-originating passengers. Northwest and United are the only U.S. passenger carriers that have fifth freedom rights from Japan.
"The deal's secured by routes and it's hard to get a handle of what the value of those things are," said another investor. "Plus, the flight attendant strike is hanging over everything."
Northwest reported a $285 million second-quarter net loss last Monday as compared to a $234 million loss last year, although it reported a net profit of $179 million compared to a loss of $288 million last year. Moody's Investors Service rated the DIP financing Ba2 and predicts the company will probably emerge from bankruptcy in early 2007. Northwest filed for bankruptcy in September 2005 due to rising labor costs and an increase in fuel prices. Bankers at Citigroup and Deutsche Bank, and a spokeswoman from JPMorgan declined comment.
