The risk Northwest Airlines' unsecured bondholders will face a big reduction in recoveries grew more likely last week after CEO Douglas Steenland said the airline would be forced to terminate pensions if Congress does not pass pension reform by the August recess. Steenland made the comment when he was in Washington urging members of Congress to quickly pass the legislation.
If the airline terminates the pension plans, the unsecured bondholders stand to lose on their recoveries because the pensions would be handed over to the Pension Benefit Guaranty Corp. which in turn could make an unsecured claim that could be pari passu with the unsecured bondholder claims. The airline, however, may choose to turn the pension liability into a package of securities that would come above the unsecured bondholders' claims as was the case in the bankruptcy of United Airlines.
"It is going to place a huge claim in the same category of the bonds. The big question for the bondholders is what deal Northwest will make with the PBGC to lessen that claim," said Roger King, airline analyst at CreditSights. He said he thinks Northwest will terminate the pensions to make the future of the company viable. Clark Orsky, an analyst at KDP Investment Advisors, agreed the bondholders stand to lose. "It is going to have big implications for the unsecureds if they terminate," he said.
A trader said the pension risk is already priced into the bonds. But, Orsky estimated there would be little recovery for the unsecured bondholders if the PBGC's claim was made pari passu with the bonds. "The PBGC claim would be so big that if you put it all in there as an unsecured claim, basically there would be no recovery for the unsecureds," he said.
The size of the PBGC's claim is difficult to calculate, said analysts, because the PBGC calculates pension liabilities differently to U.S. GAAP. A Northwest spokesman said the airline has pension liability of $3.7 billion.
There are currently two bills in Congress that deal with pension reform. A Senate bill contains language that would give a special break to airlines, allowing them to fully fund their pensions over 20 years. Special provision was given to airlines after two major airlines Northwest Airlines and Delta Air Lines filed for bankruptcy on the same day last September. But there is also a House bill that does not contain this special provision for airlines. Analysts said the pension break for airlines under the Senate bill is unpopular with other industries that do not see why airlines should get special treatment. Disagreements over reform have slowed the passage of legislation in Congress and at press time, no legislation had been passed.
