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
Class A Baa3 from Baa2
Class B Ba2 from Ba1
Class C B3 from B2
Class ABaa3 from Baa2
Class BBa2 from Ba1
Class CB3 from B1
Class CB3 from B2
Class CB3 from B2
Industrial Revenue BondsCa from Caa3
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
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
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
US Airways Group, Inc. is a major US air carrier headquartered
in Arlington, Virginia.
Michael J. Mulvaney
Moody's Investors Service
VP - Senior Credit Officer
Moody's Investors Service