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PLEASE READ AND SCROLL DOWN!

 

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Rating Action:

MOODY'S DOWNGRADES RATINGS OF NORTHWEST AIRLINES CORPORATION (CORPORATE FAMILY RATING TO Caa1); LOWERS SELECTED EETC RATINGS; SPECULATIVE GRADE LIQUIDITY RATING LOWERED TO SGL-3

21 Jun 2005
MOODY'S DOWNGRADES RATINGS OF NORTHWEST AIRLINES CORPORATION (CORPORATE FAMILY RATING TO Caa1); LOWERS SELECTED EETC RATINGS; SPECULATIVE GRADE LIQUIDITY RATING LOWERED TO SGL-3

Approximately $8.4 Billion in Debt Securities Affected

New York, June 21, 2005 -- Moody's Investors Service downgraded the debt ratings of Northwest Airlines Corporation and its primary operating subsidiary, Northwest Airlines, Inc. (collectively "Northwest"). The Corporate Family Rating (previously called the Senior Implied rating) was lowered to Caa1 from B2, and the Senior Unsecured rating was downgraded to Caa3 from Caa1. Ratings assigned to Enhanced Equipment Trust Certificates were downgraded as noted below. In addition, the company's Speculative Grade Liquidity Rating was downgraded to SGL-3 from SGL-2. The rating actions complete a review of Northwest's ratings initiated April 8, 2005. The outlook is negative.

The downgrade of Northwest's Corporate Family and Senior Unsecured ratings reflects the company's continuing operating losses and negative cash flow. Higher than expected fuel costs accompanied by limited progress in achieving needed labor cost reductions has left the company with an uncompetitive cost structure and will preclude any near term improvement in the company's operating performance. Additionally, Northwest has significantly underfunded defined benefit pension plans and faces large required contributions for the remainder of 2005 and in 2006. The company supports proposed pension reform that would provide legislative relief to extend the period of time to fund its pension plans from the current 3 to 5 year period of time to 25 years. In Moody's view, should Northwest fail to achieve the labor concessions it seeks as well as pension contribution relief, the company could need to reorganize its obligations through bankruptcy proceedings. The ratings take into account the company's current liquidity, its ongoing efforts to negotiate cost reductions with its unions, as well as its obligations related to its underfunded pension plans.

While Northwest maintains a strong route system including its domestic hubs in Minneapolis and Detroit, a significant Asian network supported by fifth freedom flying rights out of Tokyo Narita, and an important alliance with KLM, the company's operating cost structure and upcoming cash calls for pension funding and debt maturities remain significant credit challenges. Northwest's cost structure is among the highest in the U.S. airline industry, and renders the company unable to effectively compete with the growing cadre of low cost carriers in the marketplace. Northwest, like other major airlines, has sought concessions from its labor unions to reduce its operating costs, but to date only limited progress has been achieved. Moreover, the company's continuing high labor costs have been exacerbated by persistent high fuel costs, resulting in continued cash operating losses for the company. The company's cash operating losses are a particular concern in relation to its ability to sustain an adequate liquidity profile because of ongoing cash needs for pension funding, business reinvestment and upcoming debt maturities.

Northwest's balance sheet liquidity currently remains sound today; Moody's estimates unrestricted cash will be approximately $2.0 billion at the end of the second quarter. However, in the absence of changes in Northwest's cost structure and the airline pricing environment, liquidity is likely to erode over the next several quarters due to ongoing cash operating losses, pension contribution requirements and large debt maturities during 2006. The downgrade of the company's Speculative Grade Liquidity Rating to SGL-3 from SGL-2 reflects continued negative cash flow and the outlook for erosion of balance sheet liquidity, which was the primary driver of the former SGL-2 rating. Additionally, the SGL-3 rating reflects the limited access to external financial markets and the limited amount of unencumbered assets. Debt maturities for the remainder of 2005 are approximately $280 million but increase in 2006 to approximately $830 million. In addition, pension contributions for the remainder of 2005 will be approximately $244 million, and Moody's estimates that 2006 contribution requirements will be substantial.

In late 2004, the company restructured and extended its fully drawn $975 million bank line of credit that was due to mature in October 2005. The original facility consisted of a $575 million Term Loan A that matures in November 2009, and a $400 million Term Loan B that matures in November 2010. The Term Loan A amortizes over five years through 2009, with the first amortized payment of $148 million due in November 2005. In April 2005, the company successfully refinanced this first payment and created a new Term Loan C for $148 million payable in six years. Moody's assigned a B3 rating to the new Term Loan C, the same ratings Term Loans A and B currently have as a result of the rating downgrade. In addition, as part of this renegotiation, Northwest also obtained an amendment that waived the fixed charges coverage covenant from June 30, 2005 to June 30, 2006 due to the higher than expected fuel charges and labor costs which might have caused non-compliance with the covenant. The bank facility is guaranteed by Northwest Airlines Corporation and collateralized Northwest Airlines, Inc.'s Pacific division route rights and slots and by aircraft.

Selected EETC ratings were adjusted downward. The rating actions were the result of a combination of the change in the underlying ratings of Northwest and increased loan to value stress due to Moody's view of current market values of certain aircraft types in the collateral pool.

Northwest's ratings are supported by its near term liquidity profile, but could be subject to further downgrade if the liquidity position further erodes. Moreover, inability to meaningfully improve its cost structure through labor negotiations and other actions, restore profitable operations, and achieve sufficient cash flow generation to address upcoming pension and debt maturities without reducing available liquidity could also adversely affect the rating. Any potential for rating upgrade would require sustained profitable operations and free cash flow generation sufficient to address upcoming cash calls, as well as a reduction of indebtedness.

Ratings affected include:

Northwest Airlines Corporation --

Corporate Family (previously called Senior Implied) rating: to Caa1 from B2

LT Issuer rating: to Ca from Caa2

Speculative Grade Liquidity Rating: to SGL-3 from SGL-2

Guaranteed Convertible Notes to Caa3 from Caa1.

Northwest Airlines, Inc. --

Senior Unsecured debt: to Caa3 from Caa1

Senior Unsecured and Subordinated debt to be issued under the multiple seniority shelf: to (P)Caa3 from (P)Caa1 and to (P) C from (P)Caa3

Secured Bank Credit Facility:

Term Loan A: to B3 from B1

Term Loan B: to B3 from B1

Term Loan C: B3 rating Assigned

Industrial Revenue Bonds (Series 1997): to Caa3 from Caa1

Enhanced Equipment Trust Certificates, except for Aaa ratings supported by monoline insurance policies:

Series 1994-1 (Trust No.1)

Class A: to B1 from Ba2

Class B: to Caa2 from B1

Series 1994-2 (Trust No.2)

Class A: to Ba1 from Baa2

Class B: to B1 from Baa3

Class C: to B3 from Ba2

Class D: to Caa3 from Ba3

Series 1996-1

Class A: to B2 from Ba2

Class B: to Caa3 from B2

Class C: to Ca from Caa1

Series 1997-1

Class A: to Caa1 from Ba2

Class B: to Caa3 from B2

Class C: to Ca from Caa1

Series 1999-1

Class A: to Ba3 from Baa3

Class B: to Caa2 from Ba3

Class C: to Caa3 from B3

Series 1999-2

Class A: to Ba1 from Baa2

Class B: to B2 from Ba1

Class C: to B3 from B1

Series 1999-3

Class G: Aaa*

Class B: to Caa3 from B1

Class C: to Ca from B3

Series 2000-1

Class G: Aaa*

Class C: to Caa2 from B3

Series 2001-1

Class A1 and A2: to Ba2 from Baa3

Class B: to B3 from Ba2

Class C: to Caa2 from B2

Series 2001-2

Class A: to Ba1 from Baa1

Class B: to Caa2 from Ba1

Series 2002-1

Class G1 and G2: Aaa*

Class C: to B3 from B1

Series 2003-1

Class D: to Caa3 from Caa1

* Enhanced Equipment Trust Certificates supported by monoline insurance policies remain rated Aaa.

Northwest Airlines Corporation and Northwest Airlines, Inc. are headquartered in Eagan, MN.

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.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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