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Rating Action:

MOODY'S DOWNGRADES US AIRWAYS SENIOR IMPLIED RATING TO Caa2, RATING REMAINS ON REVIEW FOR POSSIBLE DOWNGRADE

28 Jun 2002
MOODY'S DOWNGRADES US AIRWAYS SENIOR IMPLIED RATING TO Caa2, RATING REMAINS ON REVIEW FOR POSSIBLE DOWNGRADE

Approximately $6 Billion of Debt Securities Affected.

New York, June 28, 2002 -- Moody's Investors Service downgraded its ratings of US Airways Group and its subsidiaries ("US Airways"). The Senior Implied Rating was downgraded to Caa2 from Caa1 and remains on review for possible downgrade, while the ratings for various secured aircraft financings (ETC's and EETC's) were also lowered, they are excluded from the ongoing review.

The rating actions were prompted by the continued deterioration in the company's financial performance, its decision to defer select payments, principally for non-publicly traded aircraft loans and leases, as part of its restructuring efforts, the weakened market values for aircraft securing certain ETC's and EETC's, and the potential for the company to seek relief in Chapter 11 bankruptcy reorganization if it is unable to receive approval for a government guaranteed loan from the Air Transport Stabilization Board (ATSB). Although the company has stated that payment deferrals are an attempt to accelerate the process of obtaining concessions from creditors and not a symptom of cash flow difficulties, it does, in Moody's opinion, indicate a lack of commitment to make timely and full payment on its obligations. In addition, it raises the potential for cross default claims as well as tightening of terms by trade creditors, either of which would add to the company's financial difficulties. In addition, the company has stated that if it does not obtain needed liquidity under a government guaranteed borrowing it may seek a judicial reorganization under a Chapter 11 bankruptcy filing. The approval of the guarantee by the ATSB is highly dependent on achieving concessions from labor groups and debt holders, among others, and a successful outcome is far from assured.

The ongoing review of the non-equipment backed debt ratings will focus on the probability of success in gaining approval of the guarantee and on the company's plans to restructure its business if the guarantee is approved. It will also consider the implications of any actions or plan revisions that might be necessary to obtain ATSB approval, as well as the company's ability to achieve concessions from key constituencies including its labor unions, suppliers and creditors. The ongoing review of the fundamental ratings will continue to assess the company's liquidity while it is negotiating to achieve an ATSB guarantee approval, and will incorporate the possibility of the company's use of the bankruptcy process to reorganize itself in the event a government supported loan cannot be arranged. Moody's noted that the ETC and EETC transactions secured by aircraft are considered more stable in their current rating categories as a result of the security provided to debt holders and the structural features associated with EETC's. Consequently, these ratings are excluded from the ongoing review, although the outlook for the ratings on these transactions is negative

Ratings affected are as follows:

US Airways Group, Inc.

Senior Implied Rating:Caa2 from Caa1

Long Term Issuer Rating:Ca from Caa3

US Airways, Inc.

Long Term Issuer RatingCaa3 from Caa2

Equipment Trust Certificates

1987 Series A through F:Caa1 from B2

1988 Series A through L:Caa1 from B2

1989 Series ACaa1 from B2

1990 Series A through D:Caa2 from B2

1991 Series A and BCa from B2

1993 Series ACaa2 from B2

Enhanced Equipment Trust Certificates;

Series 1996Class A Baa3 from Baa1

Class BBa2 from Baa3

Class CB3 from B1

Series 1998-1

Class A Baa3 from Baa2

Class B Ba2 from Ba1

Class C B3 from B2

Series 1999-1

Class ABaa3 from Baa2

Class BBa2 from Ba1

Class CB3 from B1

Series 2000-3

Class CB3 from B2

Series 2001-1

Class CB3 from B2

Industrial Revenue BondsCa from Caa3

Piedmont Aviation:

Pass through certificates:Caa2 from B2.

ETC Repackaging Trust, Series 1998 -1

Class BB3 from Ba3

Class CCaa1 from B2

Class DCaa3 from Caa1

Not affected by the downgrade or the continuing review are:

Certain classes of the company's Enhanced Equipment Trust Certificates supported by insurance policies issued by monoline insurance companies. These remain Aaa.

Certain IRB's supported by insurance policies, confirmed at Aaa

Certain IRB's issued by the Port of New York and New Jersey, confirmed at B3.

According to Moody's there are two potential scenarios facing creditors. Although they have somewhat different outcomes, both pose increased risks for debt holders. Under the first scenario currently being pursued by the company, success in achieving a loan partially guaranteed by the government would provide the company with sufficient liquidity to proceed with a comprehensive restructuring of its business. Under the second scenario, a failure to obtain the guarantee, the company has stated it may seek reorganization under Chapter 11 of the bankruptcy code. The second scenario would almost certainly have more severe implications, particularly for junior debt holders.

Fundamental credit and unsecured ratings

The current senior implied and senior unsecured ratings incorporate the potential for the approval by the ATSB of a government guarantee. Nevertheless, it is expected that the approval will only be granted if significant concessions from the company's major stake holders, including management, labor, creditors, and suppliers, can be obtained. This will require renegotiation of existing agreements with labor as well as creditors. This process is under way but far from complete and remains subject to a high level of uncertainty. Even if US Airways is successful in gaining approval for the guaranteed loan, the company will continue to face significant hurdles in achieving a stable financial profile and ratings are likely to be confirmed at current levels until cash flow strengthens substantially.

With the approval of a guaranteed loan, US Airways will have the benefit of additional liquidity and cost concessions that should improve its operating results. The added liquidity and lower costs will provide the company with needed time and flexibility to attempt to increase operating efficiency and alter its fleet configuration to more appropriately match demand. The company's restructuring plan includes deploying a significant increase in regional jets. While better matched to US Airways needs, Moody's notes that financing the new aircraft will increase debt and place an additional burden on cash flow, possibly extending the timeframe before improved credit metrics can be achieved.

Any recovery will be highly dependent on an increase in revenues. A stalled economy and, or a continuation of the current highly competitive fare environment will constrain revenue growth, both in absolute terms and on a unit basis, potentially leaving the company with marginal cash flow. Moreover, US Airways and the airline industry in general remain highly vulnerable to external shocks that could further weaken travel demand. The current ratings also reflect Moody's belief that it will be difficult for US Airways to meaningfully increase unit revenue given the likelihood of a continuation of intense competition from low cost carriers.

If a government supported loan is not approved, the company has stated that it may proceed with a Chapter 11 filing. In such a situation, unsecured ratings would be further downgraded.

Aircraft backed debt ratings - ETC's and EETCs

If the company is successful in achieving approval for a government guarantee, it is expected that debt payments under ETC and EETC structures will remain current during the near term. However, the company would still face considerable challenges in implementing a restructuring of its business and could be forced to seek Chapter 11 protection in the future if its restructuring is unsuccessful. The ratings for ETC's and EETC's incorporate these risks as well as the weak current market values of the aircraft underlying these transactions.

If US Airways is unable to obtain the government guaranteed loan and pursues a bankruptcy filing, ratings on aircraft backed transactions would likely remain at their current levels during the near term. Under this situation, the liquidity facilities and other structural features incorporated in EETC transactions would limit the potential for near term payment defaults. Moreover, these transactions as well as the rated ETC transactions, benefit from section 1110 protection and are collateralized by various aircraft assets. The current rating levels have been adjusted to reflect the degree of protection afforded investors, based on current market values. In the case of certain senior tranches of EETC's (1996, 1998 and 1999 Series A certificates) Moody's believes that these elements of protection indicate a low level of expected loss, even in the event of a bankruptcy filing by US Airways. Consequently, the ratings for these tranches remain at an investment grade level. However, in the case of the Series 1991 ETC, which does not benefit from a liquidity facility and which is collateralized by Fokker aircraft which are not currently operating and which have severely impaired current market values, the degree of expected loss is quite high. Consequently, the rating for this transaction has been positioned at Ca, equivalent to the company's senior unsecured issuer rating.

Moody's noted that the rating outlook for the ETC and EETC ratings is negative and that it will continue to assess implications for these ratings stemming from the company's restructuring plan, and the affirmation or rejection of specific aircraft financings if a bankruptcy filing is pursued. For any aircraft financings that are not affirmed under a bankruptcy scenario, the ratings will be adjusted in light of progress in liquidating the collateral and ongoing considerations about the market value of the aircraft relative to underlying debt.

Moody's notes that junior classes of EETC debt are substantially more vulnerable to declines in collateral values than are senior classes. Without the protection of cross collateralization the junior class of debt absorbs the first loss on each individual aircraft. It is therefore possible for the junior debt to experience a loss if even one aircraft in the transaction has a problematic recovery profile. For this reason and the higher over all loan to value stress at the junior class level, this class of debt is more likely, over time, to be downgraded sooner and potentially by more notches than more senior debt classes.

US Airways Group, Inc. is a major US air carrier headquartered in Arlington, Virginia.

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

New York
Richard Bittenbender
VP - Senior Credit Officer
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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