United agrees to pay extortionate interest rates on exit financing

[FWAAA]

Holy Cow! Up to $3 billion for exit financing at an interest rate which is currently over 9%. Ouch. Gonna take a lot of cash just to service debt. Add in the other long-term aircraft debt plus lease payments, and there's still big bills to pay.

United Airlines Announces Launch of Syndication of $3 Billion Exit Financing Facility

Monday January 9, 10:42 am ET

CHICAGO, Jan. 9 /PRNewswire-FirstCall/ -- UAL Corporation (OTC Bulletin Board: UALAQ - News), the holding company whose primary subsidiary is United Airlines, announced today the launch of its exit financing loan for up to $3 billion. The six-year loan will be secured by substantially all available assets and comprised of a $300 million revolving credit facility and an up to $2.7 billion term loan, both priced at LIBOR + 450 basis points. Proceeds will be used for several purposes: to repay outstanding loans under United's debtor-in-possession financing; certain bankruptcy-related expenses; working capital; and other general corporate purposes.

The financing is led by JPMorgan and Citigroup. GE Capital will act as syndication agent.

"We have been pleased that our debtor-in-possession loan has been oversubscribed, and we look forward to successful syndication of our exit facility," said Kathryn Mikells, United vice president and treasurer.

A hearing to confirm United's plan of reorganization is scheduled for Jan. 18, and the company is planning to exit bankruptcy on or about Feb. 1.

http://biz.yahoo.com/prnews/060109/cgm019.html?.v=28

 

[boxer]

I believe it's called "Risk vs. Reward."

 

[maddogdriver]

It's high, but not excessive. By no means is this a shock or unexpected. Financing for airlines as a whole is risky business for banks.

 

[hp_fa]

"We have been pleased that our debtor-in-possession loan has been oversubscribed, and we look forward to successful syndication of our exit facility,"

Of course it is oversubscribed at an interest rate higher then my credit cards.....

 

[767jetz]

To all my fellow UAL employees & supporters,

Brace yourselves. Here comes all the final critics! Everyone bitter about UA's success will come out as we approach a February exit to bash every aspect of our progress, even the interest rates that we pay on our loans. All the while forgetting the fact that obtaining these loans in the first place was something many of them said would never happen.

If only our friend USA320pilot were around now. I love to give him his just desserts.

Keep up the good work in 2006!

 

[NewHampshire Black Bears]

To all my fellow UAL employees & supporters,

Brace yourselves. Here comes all the final critics! Everyone bitter about UA's success will come out as we approach a February exit to bash every aspect of our progress, even the interest rates that we pay on our loans. All the while forgetting the fact that obtaining these loans in the first place was something many of them said would never happen.

If only our friend USA320pilot were around now. I love to give him his just desserts.

Keep up the good work in 2006!

========================================================
"jetz",

IMHO, FWAAA was just pointing out fact, AND I realize that YOU are expressing your opinion !!

"IF"(and I'm ONLY saying IF) you are putting USA320pilot and FWAAA in the same catagory/sentence, that would be a mistake.

I for one,

1. At first did NOT think UA was going to make it
2. realized later on that you(most likely) were going to make it,
And
3. Hope that you DO make it.

Ah, but what do I know, I'm just 1 ol' retired AA guy B)

Good Luck!

NH/BB's

 

[hp_fa]

To all my fellow UAL employees & supporters,

Brace yourselves. Here comes all the final critics! Everyone bitter about UA's success will come out as we approach a February exit to bash every aspect of our progress, even the interest rates that we pay on our loans.

I hope you weren't aiming at me. I was not a critic of UAL and I am not a basher of UAL. I was pointing out the obviously stupid statement that was bragging about being "oversubscribed". With that kind of interest rate it should be damn well oversubscribed.

As long as you have gotten defensive about this, how do you explain the very high interest rate? What does that tell you about what financial folks think about the ability of UAL to make a long term go of it?

 

[767jetz]

Looks like some feather's got ruffled.

Wasn't aiming at anyone in particular. Just the usual suspects. (They know who they are.)

And as for comparing anyone to USA320pilot... wouldn't do that to my worst enemy.

 

[ualdriver]

Holy Cow! Up to $3 billion for exit financing at an interest rate which is currently over 9%. Ouch. Gonna take a lot of cash just to service debt. Add in the other long-term aircraft debt plus lease payments, and there's still big bills to pay.
http://biz.yahoo.com/prnews/060109/cgm019.html?.v=28

Well, it will take $270M just to service the interest alone, and that $270M is just 1/2 of the total interest expense they expect to pay annually forward from 2006. But considering they're expecting 17B+ in revenue in 2006 (we'll see if they actually hit that target, I know), that 270M is kind of a drop in the bucket, espeically when labor and fuel are projected to cost them 7.2B alone annually going forward. It doesn't look like UAL's projected aircraft rent payments will be out of line with most of its competitors, but I'll get back to you on that. I think this interest expense is significant but we still have bigger things to worry about than a few hundred million a year in interest expenses.

 

[WorldTraveler]

This interest rate is the same as what DL is paying for DIP financing... which pretty well says that banks view DL in BK and UA after restructuring w/ the same risk.

However, it is possible that UA could issue stock or obtain other financing after exiting that would allow some of this debt to be paid down. With this kind of exit financing, UA still carries a pretty heavy debt load which will limit the ability to expand the business. I'm UA's management recognizes that fact and will address it as soon as they can.

 

[coolflyingfool]

It is a risky investment for the banks. It is just like how some banks base your loan interest rate on your credit score. Right now UA's credit score is a little low. With time they will be able to reduce those interest rates. just my thoughts...........

 

[ualdriver]

This interest rate is the same as what DL is paying for DIP financing... which pretty well says that banks view DL in BK and UA after restructuring w/ the same risk.

Actually, I don't think so. DIP financing tends to be short term debt secured by company assets. The exit financing obtained by UAL is a "long term" risk which should be reflected by a higher interest rate, all else being equal (we can disregard the flat or inverted yield curves that have existed recently in this simplistic example). So if UAL is paying the same interest rate for its "intermediate to long term" debt as DAL is paying for its "short term" debt, one would have to surmise that DAL's risk of default is higher, all else being equal because the short term debt should have a lower interest rate than the longer term debt. Obviously I realize all of this is far, far more complicated than the above but if we're talking theoretically......


With this kind of exit financing, UA still carries a pretty heavy debt load which will limit the ability to expand the business.

Interest expense = very small portion of UAL's total expenses. Fuel creeping back up above $60/bbl (assuming a relatively direct relationship between jet fuel and crude oil) = very large expense. Which of the two do you think will limit UAL's growth, or ANY airline's growth in the near to intermediate future? A few hundred million in interest expense, or a few billion in unforecast fuel expenses, for example? I have a very tall stack of chips on the latter. Any kind of debt is bad, but this debt is manageable, especially if UAL catches a break (for a change) in the future. Expect growth at this airline if fuel prices don't get more ridiculous than they already are.

The jury's still out on whether or not we'll actually earn a NET profit in 2006. That sure would be a nice change.

 

[Fly]

DL is paying a MUCH HIGHER interest rate than UAL did for DIP financing. Obviously, the banks view Delta as more of a risk financially.

 

[Cosmo]

The jury's still out on whether or not we'll actually earn a NET profit in 2006. That sure would be a nice change.

Actually, United will record a massive multi-billion dollar net profit in the first quarter of 2006 as it emerges from Chapter 11. This is because the carrier is paying only 4¢ to 8¢ on the dollar for each allowable unsecured claim, with the remainder of each claim effectively becoming a debt that is forgiven and thus income to United. But according to my understanding of the GAAP accounting rules (which might not be perfect since I'm not an accountant or CPA, and I don't even play one on TV ), this will be a "paper" net profit similar to all of the "paper" net losses recorded by United during the past three years stemming from "reorganization charges" that totalled many billions of dollars. So United should easily be able to record a huge net profit for all of 2006. But the carrier needs to continue its recent trends of reducing its costs and increasing its revenues to be sure that it records a much more important operating profit (and continued positive cash flow) for the year.

As an aside, I'm waiting for all of the "know-nothings" on this board to hypocritically claim that United's anticipated first quarter 2006 net profit is not "real" despite practically shouting that "A loss is a loss!" when United recorded equally "unreal" net losses (in contrast to significant operating profits) in recent months. Their ignorance will then be clear for all to see.

 

[mrfish3726]

Cosmos If UniTEDS reorganization plan is really set up with fuel prices at $50 to $55 a barrel, and oil is still well above the $60 range. How can YOU predict that UniTED will become profitable in 2006????? It will still be a VERY challenging year for UniTED after they're CH11 exit.