A bankruptcy court ruling this week on whether UAL Corp. secured lenders can repossess planes used as collateral could have major implications for bondholder rights in UAL bonds and the broader $30+ billion market for Enhanced Equipment Trust Certificates (EETCs). At stake are EETC holders' rights to seize planes if an issuer defaults.
The ruling in the U.S Bankruptcy Court for the Northern District of Illinois could also further complicate and lengthen the bankruptcy process for EETC creditors in the future.
Judge Eugene Wedoff recently issued a temporary restraining order barring a group of EETC holders--known collectively as the Chapman Group--from seizing 14 of the 175 planes backing bonds it holds. This week's hearing will determine whether the restraining order is, as bondholders hope, only temporary.
Investors were blocked after UAL claimed the group violated antitrust laws and the repossessions would cripple the airline during the holiday season. If bondholders are not able to repossess the planes, the ruling may have long-term repercussions on the EETC market because creditors could have to negotiate leases on an individual basis, said Roger King, analyst at CreditSights.
Legal precedent seems to be in investors' corner. "In the wording of Section 1110 of bankruptcy code, it seems clear and categorical that creditors have the right [to repossess their planes]. If that interpretation is changed, it could make the capital markets more wary of investing in aircraft-backed paper," said Philip Baggaley, managing director at Standard & Poor's. King added: "this could mean that basic EETC holders are not in a position to repossess planes... it would give airlines all the power in EETC negotiations."
Jim Spiotto, attorney at Chapman and Cutler, a Chicago law firm representing the creditors, did not return a call by press time. A call to Frederic Brace, executive v.p. and cfo of UAL and United Airlines, was returned by Jean Medina, spokeswoman. She was unable to comment by press time.
Furthermore, the case has implications for the bankruptcy procedure in general. "It's a matter of which laws prevail: antitrust or hardship," noted one high-yield transportation analyst. "If it's because of the hardship factor [that the group can't repossess its planes] obviously any bankrupt company is having troubles," he added.
The transportation analyst said thus far trading levels have not suffered due to concern surrounding the case, but added spreads have been supported by strong technical factors as well as the beginning of a downward slope in oil prices. The senior classes on UAL's EETCs were trading in the mid 80s as BW went to press on Friday.
