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Rating Action:

MOODY'S ASSIGNS B1 RATING TO UNITED AIR LINES' SECURED CREDIT FACILITY; OUTLOOK STABLE

09 Jan 2006
MOODY'S ASSIGNS B1 RATING TO UNITED AIR LINES' SECURED CREDIT FACILITY; OUTLOOK STABLE

Approximately $3 billion of debt rated

New York, January 09, 2006 -- Moody's Investors Service assigned a B1 rating to United Air Lines, Inc.'s ("United") $3 billion senior secured credit facility, and also assigned a B2 corporate family rating and a Speculative Grade Liquidity ("SGL") rating of SGL-2. The rating outlook is stable.

United's creditors have voted to accept its plan of reorganization, the bankruptcy court confirmation hearing is scheduled for January 18, 2006, and the company is expected to emerge from bankruptcy in February, 2006. The ratings take into account that, through its bankruptcy reorganization United will be able to decrease its debt load by $13 billion and materially reduce its cost structure to become more competitive within its industry. The ratings also consider United's extensive route network including a high market share at key domestic hubs and attractive routes to Asia and Europe, which could be consistent with higher ratings using Moody's rating methodologies. Nevertheless, even with the benefits of the restructuring financial metrics remain relatively weak (with EBIT to interest expense expected to be approximately 1x ) and are better reflective of the B2 corporate family rating.

Through the bankruptcy process United was able to significantly reduce its cost structure from labor savings including wage and benefit reductions, as well as beneficial changes to work rules and scope clauses in the labor contracts. Overall, United's cost savings are projected to be $7 billion on an annualized basis. As well, United terminated its defined benefit pension plans, which were assumed by the Pension Benefit Guaranty Corporation, and replaced the benefit plans with defined contribution plans. The reduced cost structure, which is now consistent with other major US carriers should permit United to compete with other carriers and to better weather the ongoing challenges of the industry. However, the operating environment is likely to remain difficult for United given high jet fuel costs and increasing competition from low-cost carriers. As well, while passenger traffic is likely to remain high over the near term, United and other carriers will be challenged to improve the yield to a level that the company can consistently generate strong cash from operations. Moody's also notes that United does not anticipate any investment in new aircraft for several years at least, which will further lengthen the average age of United's fleet. In time United will need to reinvest in its aircraft fleet in an amount which is likely to be considerable.

The ratings also consider United's recently improving operating performance resulting from its restructuring plans under which the airline reduced unprofitable capacity and optimized its aircraft fleet and domestic and international routes. The ratings also recognize the strength of United's market position, and its participation in the Star Alliance program which enhances customer loyalty. United is projected to have approximately $3 billion in balance-sheet cash and equivalents upon its bankruptcy emergence in February 2006. In light of rising fuel costs, debt maturities, and capital expenditures, United's ratings could come under pressure if balance sheet liquidity or cash flow were to significantly decline from anticipated levels.

The stable outlook reflects Moody's expectations that United's post-emergence cost structure and sizeable cash on hand will provide sufficient flexibility to weather some of the near term competitive challenges in the industry, that United will be able to generate some modest free cash flow over the near term, and that key credit metrics, including debt to EBITDA and EBIT to Interest Expense will steadily improve from the relatively weak levels. Additionally, in Moody's opinion, the industry will continue to be affected by other airlines restructuring under Chapter 11, which could allow them to lower their cost structures and further increase competition for United.

Ratings could move upward if United sustains solid operating results, lowers debt to EBITDA, to at least 6x and improves EBITDA to interest and rent to greater than 2x (measured using Moody's standard adjustments). Ratings could be adjusted downward if flat or declining operating and/or free cash flows limit United's ability to maintain cash well above $1.5 billion, and fully comply with its debt covenants. Downward pressure could also result if debt to EBITDA rises above 9x , or the operating environment weakens materially.

The SGL-2 Speculative Grade Liquidity Rating reflects good liquidity given the expectation for United's to generate modest free cash flow over the near term and the cash balance upon emergence from bankruptcy. Moody's expects that United will remain in compliance with all of its covenants in the near term. The SGL rating also reflects the company's limited borrowing capacity, since substantially all of its unencumbered assets serve as collateral for the post-emergence credit facility.

Up to $3 billion in exit financing consists of a $300 million revolving credit facility and up to a $2.7 billion term loan, both with a tenor of six years (collectively the "Facilities"). The Facilities are guaranteed by all of United's major domestic subsidiaries and its parent, UAL Corp., and collateralized by all unencumbered assets of United including aircraft, spare parts, rights to international route authorities and real estate. The B1 rating reflects Moody's belief that under stressed scenarios, liquidation of the collateral should allow full recovery of principal for investors. Proceeds from the Facilities will be used to repay approximately $1.5 billion of United's debtor-in-possession ("DIP") loans, including certain aircraft transactions that may occur under the DIP, with the remainder available for working capital and general corporate purposes.

Ratings assigned:

United Air Lines, Inc. Senior secured at B1; corporate family at B2; speculative grade liquidity rating at SGL-2

United Air Lines, Inc., a wholly owned subsidiary of UAL Corporation, is headquartered in Elk Grove Village, Illinois.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Gregory D. Clifton
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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