Northwest Airlines' bonds moved up seven to 10 points last week as investors followed the company to the wire in its negotiations with its mechanics. Investors who had bet the company would go into bankruptcy started buying back bonds as the outlook for a resolution improved. "Everyone thought they were going into bankruptcy," one trader said. "The bond price is up mainly because of short covering," another trader added. As CIN went to press the company was trying to hammer out a deal with the Aircraft Mechanics Fraternal Association before a Friday midnight deadline.
Northwest's 9.875% '07 bonds jumped 10 points to the 50-52 range, while its 10% '09s were up seven points to 48. Meanwhile, its "A" and "B" term loans were relatively flat at 96-97 and 97-99, respectively.
Gregory Clifton, a senior Moody's Investors Service analyst covering the airline industry, said the company has issues beyond the current negotiations. In addition to its efforts to restructure wages and benefits, it is also seeking to reform its pension plans, which are significantly underfunded. The company's operating losses and negative cash flow prompted Moody's to downgrade Northwest Airlines Corp.'s debt ratings and its primary operating subsidiary, Northwest Airlines, to Caa1 from B2 in June. It also downgraded its senior unsecured rating to Caa3 from Caa1. "We took the rating down because we expected that it could file for bankruptcy," Clifton said.
Roger King, an airline analyst at CreditSights, said Northwest management waited to find what wage cuts other large airlines had introduced before putting forward its own wage settlements. He believes the workers will be forced to accept the wage cuts because there are plenty of other workers who have lost their jobs at other airlines willing to take their place. King said Northwest will find it difficult to avoid bankruptcy. "They still have a large pension overhang. It is unclear whether their pension reforms will be big enough," he said. A spokesman for Northwest declined to comment.
The biggest class to lose out in bankruptcy would be the unsecured creditors. King said Northwest's term loan is well secured. "It has a lien on the best assets in the company," he said. "It also has a cash covenant that must be at least the size of the bank loan. That loan is well secured and would not be harmed in bankruptcy." King noted that the new bankruptcy law will force companies to come up with a reorganization plan within two years. "This will help the bondholders because it will speed up the time companies are in bankruptcy."
