Us Airways May Violate Loan Terms

[blueskies4ever]

US Airways may violate loan terms

Bloomberg News
Published August 5, 2004

WASHINGTON -- US Airways Group Inc., seeking cost cuts to avoid a second bankruptcy filing, said it may default on terms of a U.S. loan guarantee in this quarter.

US Airways "anticipates risk of failing to comply" with requirements for the $900 million guarantee as of Sept. 30, according to a filing at the Securities and Exchange Commission. The government board that backed the guarantee could then demand repayment, the filing said.

The Air Transport Stabilization Board, set up after the 2001 terrorist attacks to oversee guarantee grants, gave US Airways backing for a $1 billion loan that financed its exit from bankruptcy in April 2003. Without additional cost cuts, the airline may need Chapter 11 protection for a second time, the company said in the filing.

"While the company was in compliance as of June 30, 2004, continued compliance will require that the company's financial performance improve significantly," the filing said.

Terms for the loan guarantee require Arlington, Va.-based US Airways to maintain certain unspecified cash and debt terms, among other items.

The airline is seeking a third round of concessions from workers that would cut labor costs $800 million annually in an effort to stem losses. The company is negotiating with pilot and flight attendant unions while a union for mechanics and bag handlers has declined to discuss concessions.

US Airways is seeking to complete a "transformation plan" by September. US Airways posted losses of $143 million for the first half of the year, and had net income of $34 million in the second quarter on a 10 percent rise in sales.

The airline and the U.S. board amended the guarantee to waive terms for the second quarter, the filing said.

To get the relief, the company agreed to increase six payments by $16 million each starting in October 2006 and to reduce the final payment by $94 million in October 2009, according to the filing.


Copyright © 2004, Chicago Tribune

 

[WorldTraveler]

I’m not sure I know specifically what terms of the ATSB loan guarantee that US will violate. Can someone enlighten me of the specific covenant that is at risk and what the timeline is for implementing tougher covenants for each of the terms in the loan? A link to the loan guarantee terms?

 

[BoeingBoy]

WorldTraveler,

The original loan document (as well as the Plan of Reorganization) is part of a filing with the SEC. On U's web site, go to "Investor Relations", then "SEC Filings", then find a "Current Report" dated Apr 2, 2003.

Hopefully this link will take you to the correct place...

SEC Current Report 4/2/2003

Jim

 

[mwereplanes]

MAY violate is different than WILL violate. If we could differentiate between the two meanings the pilot pension would still be intact.


mr

 

[skyflyr69]

and if it happens then off to chp 11. and sort it all out just like UAL.

 

[WestCoastGuy]

Anybody know how much it cost to file a BK for a corp this size? How much was paid for the last BK filing? Just curious

 

[BoeingBoy]

Here's the entire quote from the 2Q report....

ATSB Loan


As part of its restructuring efforts, US Airways received a $900 million loan guarantee (ATSB Guarantee) under the Air Transportation Safety and System Stabilization Act from the Stabilization Board in connection with a $1 billion term loan financing (the ATSB Loan). The Company and US Airways required this loan and related guarantee in order to provide the additional liquidity necessary to carry out the restructuring plan. The ATSB Loan was funded on the Effective Date. The ATSB Loan is secured by substantially all of the assets of US Airways Group and its subsidiaries not otherwise encumbered. US Airways is the primary obligor under the ATSB Loan, which is guaranteed by the Company and each of its other domestic subsidiaries.

Effective March 12, 2004, US Airways and the Stabilization Board amended the financial covenants of the ATSB Loan to provide covenant relief for the measurement periods beginning June 30, 2004 through December 31, 2005. The ratios used in the financial covenants were adjusted and reset to align with the Company's forecast for 2004 and 2005 as of the date of the amendment, which assumed a return to profitability in 2005. In exchange for this covenant relief and other changes described below, US Airways made a voluntary prepayment of $250 million on March 12, 2004, which reduced, pro rata, all future scheduled principal payments of the ATSB Loan (rather than shortening the remaining life of the loan).

The amendment also permitted US Airways to retain, at its election, up to 25% of the net cash proceeds from any asset sale for which definitive documentation would be completed by February 28, 2005, up to a total of $125 million for all asset sales. In addition, the amendment permitted US Airways to accept a third-party secured note as consideration for certain asset sales (including the US Airways Shuttle and wholly owned regional airline assets) as long as specified conditions are met. These conditions include: the note's amortization schedule will be no more favorable than the ATSB Loan; proceeds from the note will be used to prepay the ATSB Loan; the credit strength of the ATSB Loan will not be adversely affected as measured by specified ratings tests; and the note will be pledged as collateral for the ATSB Loan. Finally, in consideration for the lenders agreeing to amend the provision related to the going concern paragraph in the independent auditor's report for the Company's audited financial statements for the year ended December 31, 2003, US Airways agreed to a revised covenant providing that month end minimum unrestricted cash would equal or exceed the lesser of the outstanding ATSB Loan balance and $700 million and that no intra-month end of day unrestricted cash balance would fall below the lesser of the outstanding ATSB Loan balance and $575 million.

Effective May 21, 2004, US Airways amended the ATSB Loan to permit use of its regional jets financed by GE utilizing mortgage debt as cross-collateral for other obligations of US Airways to GE. In consideration for this amendment, US Airways agreed to a revised covenant providing that month end minimum unrestricted cash will equal or exceed the lesser of the outstanding ATSB Loan balance and $725 million and that no intra-month end of day unrestricted cash balance will fall below the lesser of the outstanding ATSB Loan balance and $625 million. In addition, US Airways agreed to give up the right to retain up to 25% of the net cash proceeds from any asset sale, as had been permitted by the March 12, 2004 amendment. US Airways made a prepayment of $5 million in connection with this amendment.

The ATSB Loan contains financial covenants that must be satisfied by US Airways at the end of each fiscal quarter. US Airways was uncertain as to its ability to satisfy these covenants as of June 30, 2004. US Airways and the Stabilization Board amended the ATSB Loan, effective June 30, 2004, to remove the uncertainty relating to the Company's ability to satisfy its financial covenant tests for the second quarter of 2004. In consideration for this amendment, the Company agreed to change the loan amortization schedule, by increasing each of the first six principal repayment installments commencing on October 1, 2006 by approximately $16 million, and reducing the last principal repayment installment on October 1, 2009 by $94 million. While the Company was in compliance with the financial covenants as of June 30, 2004, it anticipates risk of failing to comply with the covenants as of September 30, 2004.

 

[ringmaruf]

it anticipates risk of failing to comply

This is the quote that everyone's getting so worked up about.

There's a risk that US won't comply.

No kidding.

I'm not seeing what the big deal is.

 

[WorldTraveler]

Thanks, Jim. There are ratios between EBITDAR and both fixed charges and indebtedness and they do become more restrictive as of Sept. 2004. Since the covenants listed are based on the original loan, I checked for updated covenants as a result of the ATSB renegotiation in March but do not find them specifically spelled out other than that US must reduce losses in 2004 and become profitable in 2005. Either way, I did not calculate US’s compliance with the covenants but it does not appear that they will default immediately because the covenants are written based on a consecutive series of quarters. It is possible US could be currently in default for a series of quarters that end in September ’04 but those ratios would have to be calculated.

If anyone wants to whip out the calculator, the covenants are in article 6. There is also a covenant that the company is responsible for notifying the ATSB if any labor actions will adversely affect the loan. Suppose US has made that filing?

As for bankruptcy, I doubt if it can cure US’ default of the loan, should that occur. I obviously didn’t read the entire document but the purpose of chapter 11 is undoubtedly to preserve cash in order to make guaranteed obligations and cut costs where they can be cut; if US defaults, the lenders and ATSB can demand immediate repayment of the entire outstanding payment. In other words, as soon as US reports that it has not met a financial covenant, the company will probably be shut down unless the covenants have been renegotiated in advance.

 

[Doc]

I’m not sure I know specifically what terms of the ATSB loan guarantee that US will violate. Can someone enlighten me of the specific covenant that is at risk and what the timeline is for implementing tougher covenants for each of the terms in the loan? A link to the loan guarantee terms?

It's a secret..... so they can say what ever they want.

 

[usair_begins_with_u]

It don't look pretty from where I sit.. Unless a miracle happens, I dont see how UAir can maintain its restricted cash balances by the end of 3Q...

 

[BoeingBoy]

WorldTraveler,

I haven't seen any specific on any changes in the financial performance requirements, either. I can only guess that they were somewhat relaxed for this year.

Jim

 

[WorldTraveler]

There are covenants for the GECAS loans which are not public; clearly by not making those covenants public, mgmt has control.

 

[sfb]

Well, I tried to go through the loan agreement and figure out the numbers subject to the covenants and the associated definitions. It appears that the key number, as alluded to by others, is the ratio of total indebtedness to cumulative EBITDAR for a series of quarters. To summarize, total indebtedness must be no greater than 7.5 times cumulative EBITDAR for the first two quarters and first three quarters of this year (measured each period) and no greater than 7 times cumulative EBITDAR for the full year. From looking at the 10-Q for 2004Q2, cumulative EBITDAR for the first two quarters looked to be about $274 million (the "R" only includes aircraft rent, and EBITDAR also includes non-cash stock compensation that's likely to be minimal), while total indebtedness seems to be at least $2.965 billion (this is just current debt maturities, long-term debt maturities, and capital lease obligations), giving a ratio of 10.82.

It appears that US would need EBITDAR of at least $100 million for the 3rd quarter, which appears to mean that operating loss has to be under $75 million or so (assuming comparable depreciation, amortization, and aircraft rent to 2Q). Of course, if I'm missing items from the "consolidated indebtedness," that makes the target harder to reach. The tougher target looks to be the end-of year, since EBITDAR will have to be positive by at least $25 million in the weak fourth quarter as well.

 

[WorldTraveler]

Those numbers look plausible and rather unlikely to be met.