Many investors are opting for a layover on the UAL Corp. $1.2 billion debtor-in-possession deal led by J.P. Morgan, Citibank, Bank One and CIT Group. Despite eye catching pricing, some market players are still avoiding the long-time negative cash flow airline. An investor who opted not to participate in the deal quoted pricing levels climbing and possibly surpassing the LIBOR plus 6% range with a 3% LIBOR floor, as well as an original issue discount up to 5%. The deal launched last December with a LIBOR plus 41/ 2% coupon and a 2% LIBOR floor. Commitment levels could not be confirmed by press time, but one investor said credit issues were the main things keeping investors away. Without the DIP, the company will not survive, according to a company report.
A central issue is collateral. "Some aircraft values have dropped 50-70%," said I-Wen Lim, a research associate from The Seaport Group, a brokerage boutique that is looking into UAL's enhanced equipment trust certificates (EETCs). She noted that lenders might be more focused on tangible assets, and investors said last week that is at the heart of the problem. One buysider said that unencumbered collateral such as plane routes secure the credit, while the EETCs are secured by planes. "It's going to be uphill," he said, commenting on UAL's journey to profitability. "In a DIP loan if the company emerges, you don't lose money. But UAL is generating negative cash flow and could go into Chapter 7," he added.
UAL is soon expected to present details of a cost cutting and positive cash flow restructuring plan. Tough covenants on the credit provide that UAL will default on the loan if it does not show positive results by Feb. 15. Lim noted that this deadline for improvement is what many investors are waiting on. "This is when we look at where this airline is going," she stated. But she added that unfulfilled requirements might be rolled over. "UAL is not going to pull the plug just yet," she said. "They definitely still have some cash on the balance sheet, but the outlook isn't so great." As reported last week, UAL's fourth quarter loss widened to $1.5 billion.
Lim did, however, note that bankruptcy is a competitive advantage for UAL. The ability to reject leases and override union plans, as well as other restructuring capabilities, provide more chances for the company to resuscitate. The credit comprises a $800 million revolver and a $400 million loan. Bank One also provided a separate $300 million amortizing term loan on the assumption of UAL's co-branded credit cards with the lender. The solo loan and the club piece were contingent upon one another to take effect. Officials from all four banks did not return several calls for comment. A UAL spokesman referred all inquiries to public bankruptcy reports.