UAL Looking For DIP Financing


Aug 19, 2002
UAL seeking up to $2 bln in DIP financing-sources
Thursday November 14, 1:49 pm ET
By Dane Hamilton and Kathy Fieweger
CHICAGO/NEW YORK, Nov 14 (Reuters) - UAL Corp. (NYSE:UAL - News), parent of money-losing United Airlines, is in talks with lenders to arrange loans of up to $2 billion to maintain operations if it files for bankruptcy, people familiar with the situation said.

In what would be one of the largest such loans of its kind, UAL is seeking the debtor in possession financing from leading banks, including J.P. Morgan Chase (NYSE:JPM - News), Citigroup (NYSE:C - News) and GE Capital the financing arm of General Electric Co. (NYSE:GE - News), these people said.
The size of the loan is still under discussion and the airline may eventually go for only $1 billion to $1.5 billion, sources said. However, the talks are part of United''s contingency plan should the No. 2 U.S. air carrier be forced to file for Chapter 11 bankruptcy protection to fend off creditors holding billions of dollars worth of debt.
This doesn''t indicate either way that a Chapter 11 filing will happen, said one person involved in the discussions over the DIP financing.
Another person involved in the talks said UAL would be crazy not to be looking for a DIP, since it would face dire financial consequences without operating funds.
Officials at United, based in Elk Grove Village, Illinois, were not immediately available for comment.
DIP loans are typically approved by a bankruptcy judge and often aimed at reassuring vendors and others that a company can continue to pay debts during the court-supervised restructuring process.
Putting a DIP loan in place can also be a negotiating tactic to show the unions that the company is serious about filing for bankruptcy, where a court can void labor contracts, experts say. United is currently in tough negotiations with labor unions to win concessions.
Looking for DIP financing sends a very strong signal to labor unions that the company is serious about filing for bankruptcy and is unable to work out its issues with the unions, said Barry Dichter, a bankruptcy lawyer with Cadwalader, Wickersham & Taft, a New York law firm.
UAL shares were down 11 cents, or 3 percent, at $3.56 in afternoon New York Stock Exchange trade.
The DIP loan talks come as UAL is pressing the federal government for a $1.8 billion guarantee on a private-sector loan of up to $2 billion. Also, some $375 million in debt payments come due on Dec. 2 even after the company recently renegotiated a big payment to the German bank KfW.
Senior advisors to United say it could pay the $375 million, but that would leave it with little operating cash for an airline that is hemorrhaging between $8 million and $10 million a day. Without the loan guarantees, the company has warned that it is likely to seek Chapter 11 bankruptcy protection.
J.P. Morgan, Citigroup and GE Capital are the leading providers of DIP loans, so it''s no surprise that UAL would look to those banks first for such a large loan.
Such loans, while expensive for the borrower, bring in large fees for the lender and are generally senior to most other forms of debt during the bankruptcy process. Typically, the whole of the loan isn''t drawn down, but fees are paid to the lender to keep the loan in place.
The discussions for the DIP financing come as United is in protracted labor negotiations with unions, including the International Association of Machinists, which has a history of contentious relations with the company.
The airline has recently negotiated specific deals with pilots, flight attendants and smaller unions.
In the case of US Airways Group (OTC BB:UAWGQ.OB - News), sources noted that the airline''s management discussed both bankruptcy and non-bankruptcy labor deals, giving DIP lenders more confidence.
One source called $2 billion the starting point of what they (United) were looking for. But since the airline has deferred payments due to KfW, its immediate cash needs have been reduced.
While is not essential for companies to have DIP financing in place when filing for bankruptcy, one source said airlines are a different case.
With huge cash drains every day, airlines in trouble typically draw down a big portion of their DIP financing immediately and like to have a large figure or show DIP available to show panicky suppliers, vendors and customers.
This should come as absolutely no surprise. It would be derelect for UA not to seek other forms of financing should we be forced to file for Ch.11.
I don't get it. United says the capital markets are now closed to them, hence the need for the ATSB guarantees, and they're not bankrupt.

Yet it appears that if they file Chapter 11, suddenly these same capital markets become open to them, ATSB guarantees or not. Why are the lending institutions so eager to make loans to bankrupt companies, when these same companies could not secure credit from them outside of bankruptcy??

One would think the lenders would certainly be exposed to much greater risk when lending to a company in Chapter 11. I know they would stand to gain more lucrative paybacks via higher interest and other forms of gouging, but isn't that more than offset by the much greater risk of making loans to a bankrupt company?

This all seems bass ackwards to me. It is as though the financial institutions encourage bankruptcy. If so, such a policy is in and of itself bankrupt, morally and otherwise, and ought to be outlawed.


PS--I got an email response from United regarding the letters of support they are trying to gather. They will soon receive my strongly worded letter of support, imploring our government to assist United as it struggles to regain its financial health. United is a backbone of our transportation infrastructure. The economy depends on United, as do 80 something thousand jobs, including about 16,000 right here in the economically hard-hit Bay Area.

You can bet my Senators, Feinstein and Boxer will be supporting United, as will the new House Minority Leader Nancy Pelosi. I will contact them all just to make sure and find out if there's anything else I can do. Good luck to all of you at United! I will start a new thread and post the letter I got from United or post it in the thread that asked people to contact [email protected].

Financial institutions are willing to provide DIP money because the Bankruptcy Court gives superpriority to DIP creditors in the event of a liquidation. Furthermore, DIP loans are often guaranteed by most if not substantially all of a company's assets. Therefore, the risk to DIP lenders is relatively low compared to the possibility of being wiped out in the event an out-of-court restructuring fails.