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Rating Action:

MOODY'S ASSIGNS Ba2 RATING TO NORTHWEST AIRLINES DIP FACILITIES

09 Aug 2006
MOODY'S ASSIGNS Ba2 RATING TO NORTHWEST AIRLINES DIP FACILITIES

$1.225 Billion of Debtor-In-Possession Financing

New York, August 09, 2006 -- Moody's Investors Service has assigned a Ba2 rating to the $1.225 billion Debtor-In-Possession ("DIP") financing of Northwest Airlines Inc. ("Northwest") as a debtor-in-possession. The rating is on a point-in-time basis and will not be monitored going forward.

In Moody's view it is highly probable that Northwest will emerge from bankruptcy protection, perhaps in early 2007. While under the protection of the bankruptcy court since September of 2005, Northwest has made measured progress in resetting its cost structure to competitive levels by revising its labor agreements, reducing its fleet and restructuring aircraft leases and debt. In addition, under pension reform legislation that is likely to be enacted, Northwest will benefit from the special provisions to be directed to airlines. If Northwest is not successful in emerging from bankruptcy under its current timetable, however, Moody's believes that the collateral supporting the DIP facility is of sufficient value that the DIP lenders will be repaid in full. Northwest has pledged its Pacific Route Authorities, including the particularly valuable U.S. to Japan routes in which the airline benefits from "Fifth Freedom" rights. The DIP facilities benefit from a super-priority status over all other obligations of Northwest, NWAC, Holdings and all subsidiaries.

Northwest's restructuring has focused on labor savings, debt restructuring, optimizing its fleet, pension relief and other cost savings initiatives. For example, the company recently achieved an estimated $1.4 billion in labor cost savings. Contracts are ratified by all unions with the exception of the flight attendants, although Northwest has implemented new contract terms for the flight attendants consistent with bankruptcy court approval in June 2006. Additionally, the company successfully restructured certain aircraft leases and reduced its debt levels, and achieved cost savings due to aircraft ownership reductions. Importantly, under revised pension legislation the airline will be able to fund frozen defined benefit pension plans over a seventeen-year horizon.

Moody's views the Pacific Route Authorities as adequate collateral protection, and these "Fifth Freedom" rights include passenger and cargo landing rights which could be sold separately. The realizable value of the passenger rights is much less certain than that of the cargo rights. For the passenger rights, Northwest's operations between the U.S. and Japan are highly-desirable, not only because of the size of the U.S. and Japanese economies, but also the authority to carry passengers beyond Japan and to serve passengers originating in Japan. While attractive to a number of U.S. operators, the value could be constrained due to the current limited incremental debt capacity of many U.S. passenger airlines. Although the separation of cargo and passenger rights is a complex process, in Moody's opinion the cargo rights have a more predictable realizable value for a freight carrier as they provide immediate access to lucrative air cargo markets and there are a number of financially strong bidders.

The DIP facility covenants provide further strength to the financing by mandating an annual appraisal, as well as a minimum ratio of appraised value to the loan amount of 1.5x. Additionally, Northwest is required to maintain minimum unrestricted cash and cash equivalents of $750 million, and EBITDAR (as defined) to fixed charges initially of 1.15x escalating to 1.5x by the fourth quarter of 2007.

Northwest Airlines, Inc. and its parent company, Northwest Airlines Corporation, are headquartered in Eagan, Minnesota.

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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