Loan Covenants

[Rob]

Today's AW&ST says, "In its SEC filing, US Airways made clear why ... it is no longer considering the sale of assets ... Among terms of the original $1 billion loan, US Airways was to apply any proceeds from an asset sale to the principal of the loan. In March, negotiating an amendment to apply covenant relief, the carrier agreed to pay down $250 million of the loan. In return it won the right to retain as much as 25% of net proceeds from an asset sale completed by Feb. 28, 2005. But it gave back that right in in little more than two months. Effective May 21, as part of a loan amendment relaxing restrictions on using RJs as collateral in its complex dealings with GE, US Airways agreed to eliminate the provision allowing it to retain proceeds from an asset sale."

So now we know why management says asset sales are no longer being considered.

What shell is the pea under?

 

[BoeingBoy]

Rob,

And U paid $5 million more of the loan off for the priviledge of not getting to keep the 25%, too.

[2Q04 Report] 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.

And if that isn't enough...

[2Q04 Report] 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.

Jim

 

[RowUnderDCA]

Ok, here's the uninformed boy's question-

What would creditors say to the following?

U gets concessions from pilots roughly consistent with their goals and attractive profit sharing.

U gets some concessions from F/As allowing it to get whatever work rule improvements it says it needs, but not the salary give backs it asking for and no profit sharing from F/As (basically, the F/As decline profit sharing for higher salaries);

U gets no concessions or profit sharing from Mechanics, but presents a comprehensive plan from the state of Alabama for extremely attractive lease rates and employee training and support for relocating facilities to BHM and/or MOB (assuming this is consistent with the contract and the proposal is flexible enough to deal with the winning or losing of the arbitration) and it rejects all leases at PIT;

U gets no concessions or profit sharing from CWA but presents a plan to automate, simplify, webbify, enhanced retirify, layoff and restructure with a reasonable expectation of reduction in costs and an increase in customer service from the most expert res and agent staff in the industry to assist with the complex and accomodative product selection offered (regional to international with Star and interlining, etc) but with simple fares for the majority.

U goes forward with redeploying aircraft to a p2p format, with PHL rolling and CLT traditional hubbing.

Can U do this? Can U avoid Ch. 11? Would it need more cash than it is likely to have? Would it attract more financing, or is the magnet of the LCC expansion just too strong? Would it require reducing fleet size? Would reducing fleet size send it's unit costs so high as to be in a double bind?

 

[usair_begins_with_u]

Consessions or no consessions, UAir will break its loan covenants in 3Q. There is no way expected 3Q losses will not drain cash below required reserves.

 

[UseYourHead]

Are we complaining that asset sales are no longer a part of the strategy? I am happy about that, maintain or grow the airline sounds much better to me, and that is Plan A...while plan B is simply no more airline.

Today's AW&ST says, "In its SEC filing, US Airways made clear why ... it is no longer considering the sale of assets ... Among terms of the original $1 billion loan, US Airways was to apply any proceeds from an asset sale to the principal of the loan. In March, negotiating an amendment to apply covenant relief, the carrier agreed to pay down $250 million of the loan. In return it won the right to retain as much as 25% of net proceeds from an asset sale completed by Feb. 28, 2005. But it gave back that right in in little more than two months. Effective May 21, as part of a loan amendment relaxing restrictions on using RJs as collateral in its complex dealings with GE, US Airways agreed to eliminate the provision allowing it to retain proceeds from an asset sale."

So now we know why management says asset sales are no longer being considered.

What shell is the pea under?

[post="169587"][/post]​

 

[UseYourHead]

Bankruptcy, will occur in this scenario. One way or another, all groups will participate.

The groups that negotiate will get a better deal than that handed down bu the judge...people are fooling themselves to dream otherwise...either way, it will be painful.

Ok, here's the uninformed boy's question-

What would creditors say to the following?

U gets concessions from pilots roughly consistent with their goals and attractive profit sharing.

U gets some concessions from F/As allowing it to get whatever work rule improvements it says it needs, but not the salary give backs it asking for and no profit sharing from F/As (basically, the F/As decline profit sharing for higher salaries);

U gets no concessions or profit sharing from Mechanics, but presents a comprehensive plan from the state of Alabama for extremely attractive lease rates and employee training and support for relocating facilities to BHM and/or MOB (assuming this is consistent with the contract and the proposal is flexible enough to deal with the winning or losing of the arbitration) and it rejects all leases at PIT;

U gets no concessions or profit sharing from CWA but presents a plan to automate, simplify, webbify, enhanced retirify, layoff and restructure with a reasonable expectation of reduction in costs and an increase in customer service from the most expert res and agent staff in the industry to assist with the complex and accomodative product selection offered (regional to international with Star and interlining, etc) but with simple fares for the majority.

U goes forward with redeploying aircraft to a p2p format, with PHL rolling and CLT traditional hubbing.

Can U do this? Can U avoid Ch. 11? Would it need more cash than it is likely to have? Would it attract more financing, or is the magnet of the LCC expansion just too strong? Would it require reducing fleet size? Would reducing fleet size send it's unit costs so high as to be in a double bind?

[post="169642"][/post]​

 

[funguy2]

I think U management has figured out that no airline has survived asset sales... Pan Am didn't... TWA didn't... They did live to fight another day... for years on this basis, but in the end, they never fixed their core issues...

US Airways is the same... selling assets won't fix the core issues... It only saps resources from fixing the core issues (if you are focused on selling assets you are not focused on reducing costs...)

 

[sfb]

Bankruptcy, will occur in this scenario. One way or another, all groups will participate.

The groups that negotiate will get a better deal than that handed down bu the judge...people are fooling themselves to dream otherwise...either way, it will be painful.

[post="169661"][/post]​

The judge will not "hand down" a deal to any of the labor groups. The judge will either (a) allow the company to reject the contract(s) with its union(s) or (B) not allow the company to reject the contract(s). If (a) does happen (which I think is likely), the company will be free to impose a contract(s) of its choosing, at which point the affected labor group(s) will be free to exercise self-help. And I just can't see the company being able to survive a strike while in bankruptcy. Maybe they're counting on getting enough mechanics to cross to do line maintenance, along with bringing in contract mechanics in most places. Who knows?

To be honest, US didn't have a lot to sell without making the airline even less viable. After US rejected the PIT leases, pretty much anyone could go into PIT and take gates that US now uses month-to-month. PHL has WN now, and US can't really afford to lose it given how much revenue it brings in and the fact that PHL is the only hub which can support transatlantic service to more than three cities. The Shuttle isn't worth what it used to be, and again, selling facilities or slots at DCA, LGA, or BOS (no slots @BOS) would be damaging to the network. Selling CLT would force US to retreat to a small region of the country. The planes are mostly leased. Piedmont's not worth much since it flies props, and PSA needs to grow its RJ fleet before it has value. And besides, if US hadn't given up the right to sell assets and keep some of the proceeds, they probably would have had to pay down more of the loan instead.

I think that US will be OK with the cash requirements in Q3 unless the company has some big outlays (and the scheduled pension payment would be one of them). It's my opinion that the real problem will be the EBITDAR to debt targets. I calculated a while back that US would have to show an operating profit of $100 million or so this quarter to make its target. And I think the big question mark here will be September, since summer traffic is likely to be strong, but revenue will fall off the cliff after Labor Day with school starting and folks avoiding travel on or around September 11. Possible concessions won't be in place in time for this quarter. What the concessions would do is essentially convince the creditors and/or ATSB to not pull the plug if the company fails to satisfy the covenants this quarter.

I just feel that management has handled relations with its labor groups post-bankruptcy so poorly that the well has been poisoned. Why open your contract when the company has done such a poor job of honoring the existing one? And at least in the case of the IAM-represented workers -- why would they vote for a new contract which would put 80-90% of themselves out of a job? They sure aren't going to do it to save the pilots.

 

[funguy2]

The judge will not "hand down" a deal to any of the labor groups. The judge will either (a) allow the company to reject the contract(s) with its union(s) or (B) not allow the company to reject the contract(s). If (a) does happen (which I think is likely), the company will be free to impose a contract(s) of its choosing, at which point the affected labor group(s) will be free to exercise self-help. And I just can't see the company being able to survive a strike while in bankruptcy. Maybe they're counting on getting enough mechanics to cross to do line maintenance, along with bringing in contract mechanics in most places. Who knows?

To be honest, US didn't have a lot to sell without making the airline even less viable. After US rejected the PIT leases, pretty much anyone could go into PIT and take gates that US now uses month-to-month. PHL has WN now, and US can't really afford to lose it given how much revenue it brings in and the fact that PHL is the only hub which can support transatlantic service to more than three cities. The Shuttle isn't worth what it used to be, and again, selling facilities or slots at DCA, LGA, or BOS (no slots @BOS) would be damaging to the network. Selling CLT would force US to retreat to a small region of the country. The planes are mostly leased. Piedmont's not worth much since it flies props, and PSA needs to grow its RJ fleet before it has value. And besides, if US hadn't given up the right to sell assets and keep some of the proceeds, they probably would have had to pay down more of the loan instead.

I think that US will be OK with the cash requirements in Q3 unless the company has some big outlays (and the scheduled pension payment would be one of them). It's my opinion that the real problem will be the EBITDAR to debt targets. I calculated a while back that US would have to show an operating profit of $100 million or so this quarter to make its target. And I think the big question mark here will be September, since summer traffic is likely to be strong, but revenue will fall off the cliff after Labor Day with school starting and folks avoiding travel on or around September 11. Possible concessions won't be in place in time for this quarter. What the concessions would do is essentially convince the creditors and/or ATSB to not pull the plug if the company fails to satisfy the covenants this quarter.

I just feel that management has handled relations with its labor groups post-bankruptcy so poorly that the well has been poisoned. Why open your contract when the company has done such a poor job of honoring the existing one? And at least in the case of the IAM-represented workers -- why would they vote for a new contract which would put 80-90% of themselves out of a job? They sure aren't going to do it to save the pilots.

[post="169744"][/post]​

Nice analysis sfb. I have not looked into the EBITDAR covenents... can you share, briefly, what they are? I trust your analysis, but I have trouble believing that 3Q can be profitable for a N/S airline, combined with todays fuel prices. I'm not sure breakeven is possible, let alone $100mil operating profit.

 

[BoeingBoy]

I also agree with sfb. But remember one little detail - the AmEx agreement. It is more restrictive on "cash" than the ATSB covenants.

IIRC, we have to keep something like $825-850 million on hand or deposit another $50 million or so in "trust". If we cross that threshold, we'll have little cash left going into the 4th quarter.

Jim

 

[WorldTraveler]

I too am interested in the newly negotiated covenants since I have not seen anything public showing what they change to as of Sept. 13.

Aren't the pension payments due to the CWA and IAM group members's pensions? If so, then not getting an agreement from those groups will spell BK because the minimum cash on hand covenants will likely be violated.

The transatlantic routes do provide some revenue balance for the N/S focus. I suspect fuel price growth has outstripped any revenue growth.

"I just feel that management has handled relations with its labor groups post-bankruptcy so poorly that the well has been poisoned. Why open your contract when the company has done such a poor job of honoring the existing one? And at least in the case of the IAM-represented workers -- why would they vote for a new contract which would put 80-90% of themselves out of a job? They sure aren't going to do it to save the pilots. "

You are right on target, sfb, but I don't think US has any employee friendly options available. The same is true of UA which is why I believe both airlines will not exist longer term. AA came to the brink, got relief and can probably restructure w/ the support of its employees. DL is trying the same thing - only to a greater degree; I'm still optimistic DL will put it off. NW has not played the risk game DL has played and may have a much harder time getting its costs down. CO is already in a pretty good place and will have to make relatively small tweaks to get where it needs to be. Bottom line, there is a reason why bankruptcy has a nearly 100% death rate for airlines - because it requires harming employees so much that they will never support what is necessary to obtain the financial plan necessary to make an airline work.

 

[Rob]

BoeingBoy/Jim, Thanks for the lesson. Since I have no financial interest in US, I only checked the numbers on the balance sheet when the 10-Q came out, and thus the additional concession came as a surprise to me. The company publicized the change in amortization when it occurred but not the sale of assets covenant.

Absent this covenant I was estimating that Piedmont and MDA could be sold even if only as some kind of leveraged buyouts and, as such, would have been sources of some little cash while remaining mainline feeders. That option is gone and I think the company was a little cute about how they revealed it.

I no longer feel the situation is salvable.

 

[sfb]

I also agree with sfb. But remember one little detail - the AmEx agreement. It is more restrictive on "cash" than the ATSB covenants.

IIRC, we have to keep something like $825-850 million on hand or deposit another $50 million or so in "trust". If we cross that threshold, we'll have little cash left going into the 4th quarter.

Jim

[post="169750"][/post]​

Now, I didn't realize that the AmEx agreement was so restrictive, but it's understandable given that the company's air traffic/unused tickets liability was about $1.1 billion at end-of-quarter.

The loan covenants are contained in the company's filing of its plan of reorganization, which can be found here. It's a big file so be patient if you're on dialup. The loan document is "Plan Exhibit G" which can be found a bit less than halfway through the document; the relevant section of "Negative Covenants" is Article VI and most terms contained therein (like EBITDAR, for example) can be found in Article I.

In another thread, I did some VERY rough calculations (I wish I could find it but I can't seem to find it in the search) and I seem to recall finding that the company needed about $175-200 million in EBITDAR for the third quarter to avoid busting the applicable covenant (Section 6.4.b.) which is "consolidated indebtedness" to "EBITDAR" (both defined in Article I) of no more than 7.50 to 1.

 

[BoeingBoy]

sfb,

Like WorldTraveler, I have not seen any reporting on exactly what changed in the covenants back in Mar when they were restructured and the $250 million was "pre-payed".

" Effective March 12, 2004, US Airways entered into an amendment to the ATSB Loan which provided for a partial prepayment of the loan and modifications of financial covenants (covenant relief) for the measurement periods beginning June 30, 2004 through December 31, 2005. Existing ratios used in financial covenants were adjusted and reset to accommodate the Company’s forecast for 2004 and 2005."

Jim

 

[sfb]

Well, I found where the modified covenants would have been, but they don't seem to be readily available from the SEC. They're filed as exhibits incorporated into the company's 10-Q filings, but those particular exhibits seem to be omitted from the electronic filings.