Markets & Finance

S&P Cuts Ratings for UAL


On Nov. 29, Standard & Poor's Ratings Services lowered its long-term corporate credit ratings on UAL Corp. (UAL) and subsidiary United Air Lines (United) to 'CCC-' from 'CCC', following the announcement that United's mechanics had rejected a concessionary pact negotiated as part of the airline's effort to secure a federal loan guaranty.

At the same time, the other ratings on United and UAL were also lowered, except for the 'CC' senior unsecured debt rating. The ratings on each entity remain on CreditWatch with developing implications.

The mechanics' vote makes bankruptcy virtually inevitable for United and UAL, says S&P analysts Philip Baggaley and Kenton Freitag. Although the airline will reopen negotiations with its mechanics' union, it appears unlikely that a revised agreement can be negotiated and approved before United has to make a large debt payment. Even if an agreement is reached, the Air Transportation Stabilization Board is not likely to approve a business plan that scales back promised labor concessions from levels already challenged by some as being insufficient to help correct United's high operating cost structure.

The ratings on UAL and United could be raised if the companies are able to obtain material cost savings and obtain a federal loan guaranty. Alternatively, the ratings could be lowered if they fail to do so, which would very likely lead to a bankruptcy filing. In addition, any negotiated reduction in scheduled principal or interest would represent a default on a rated issue and result in the corporate credit ratings on UAL and United being lowered to 'SD' (selective default) or 'D' (default).

Liquidity. UAL's liquidity is very constrained. United is due to make a $375 million debt payment on its 1997-1 enhanced equipment trust certificates Dec. 2, but may well take advantage of a 10-business-day grace period that runs to Dec. 16 while it attempts to salvage its loan guaranty application and avoid bankruptcy.

Meanwhile, the airline is consuming about $7 million daily in cash operating losses, reducing cash reserves that were described as over $1 billion by UAL executive Glenn Tilton on Nov. 21. The company would not want to let its cash balance fall much lower for fear of not being able to reorganize in Chapter 11 if it is forced to file for bankruptcy.

US Airways, an airline about one-half the size of United, entered Chapter 11 with almost $1 billion of cash. United is currently seeking to arrange a $2 billion debtor-in-possession credit facility as part of its bankruptcy contingency preparations. From Standard & Poor's RatingsDirect


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