MOODY'S ASSIGNS B2 RATING TO AIRTRAN AIRLINES' 144A 10.5% SR. SECURED NOTES; CONFIRMS THE 10.25% SR. UNSECURED NOTES AT B3.
New York, 12-01-97 -- Moody's Investors Service assigned a B2 rating to AirTran Airlines, Inc. (Airlines), formerly ValuJet Airlines, Inc., $80 million, 10.5% senior secured notes due 2001, and confirmed the company's $150 million, 10.25% senior notes due 2001at B3. The ratings reflect the airline's reemergence following a devastating accident, its prospects for recapturing market share at Atlanta, as well as its relatively high leverage and level of encumbered assets. The rating on the 10.25% notes also reflects their subordinated position relative to the 10.5% notes which are secured by aircraft. This rating action concludes Moody's review.
On November 18, 1997, ValuJet, Inc. merged with AirWays Corporation which was remaned AirTran Holdings, Inc. This was the final step in a process which also involved a name change for ValuJet to AirTran Airlines, Inc. AirTran Holdings will have two subsidiaries, AirTran Airlines and AirTran Airways (Airways) which for the time being will operate under seperate operating certificates.
Airlines, formerly ValuJet, has changed its livery on all of the 32 DC-9 which it operates. Additionally, it is offering business class seating while maintaining its low fare strategy. ValuJet grew rapidly prior to the crash of flight 592 on May 11, 1996, serving 30 cities with 51 aircraft. However, following the crash, the FAA suspended the airline's flights based on concerns over its safety procedures and conducted a lengthy investigation of its maintenance program. ValuJet resumed operations on a limited scale on September 30, 1996, and is gradually increasing service, subject to FAA recertification of aircraft. Despite the resumption in flights, ValuJet is struggling to recover its previous market share and return to profitability. Additionally, in order to sustain its operations, the company has increased its borrowings, resulting in significantly higher leverage and poorer debt protection measurements than previously. Nevertheless, cash balances of $123 million at the end of the third quarter provide a considerable amount of liquidity and should be sufficient to sustain the company until operations turn cash positive. The name and livery change as well as new authorities to fly from LaGuardia to Atlanta are expected to result in improved operating performance in 1998. ValuJet is also expected to benefit from synergies from the merger with Airways.
The proceeds of the 10.5% issue were used to refinance bank debt and purchase four hush kits. ValuJet had been in violation of its financial covenants under the bank facility. The bonds, which do not contain financial covenants, are secured by 24 DC-9-30s, manufactured between 1967 and 1976. Nineteen of the aircraft have been hush kitted to date and comply with Stage 3 noise regulations. The financing represents approximately 69% of the appraised value of the aircraft in 1997 and 88% in 2001. However, these are older aircraft that have been out of production for many years. Their age may make values more volatile and there may be significant difficulty in remarketing them.
Moody's noted that holders of the 10.25% unsecured bonds have effectively been subordinated to secured creditors and that there may be insufficient value in the remaining assets in relation to the size of the bond. In addition, both indentures contain only minimal limitations on debt incurred in connection with the purchase of new aircraft. Because all of ValuJet's aircraft purchases to date have been financed with secured debt, future purchases are likely to be financed in a similar way, increasing the overall amount of secured debt.
AirTran Holdings, Inc. and its subsidiaries, AirTran Airlines, Inc. and AirTran Airways, Inc. are headquartered in Orlando, Florida.
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