MOODY'S RATES UNITED AIRLINES' PROPOSED $1.5 BILLION EETC (A Tranche Aa2); RATINGS ON REVIEW FOR POSSIBLE DOWNGRADE
Moody's Investors Service has assigned the following ratings to United Airlines ('United') Enhanced Pass-through Certificates (PTC) Series 2000-2:
$340,397,000 Class A-1 Certificates: Aa2 on review for possible downgrade
$711,133,000 Class A-2 Certificates: Aa2 on review for possible downgrade
$270,517,000 Class B Certificates: A1 on review for possible downgrade
$187,968,000 Class C Certificates: A3 on review for possible downgrade.
Each of the newly assigned ratings has been simultaneously placed under review for possible downgrade in conjunction with the ongoing review for possible downgrade of all ratings of United.
Proceeds of the issue will be used to purchase equipment notes to be issued in connection with 35 separate loan transactions associated with aircraft currently in the United fleet. Aircraft provided as security are ten vintage 1998 Airbus A319-131's, four vintage 1997 and two vintage 1998 Airbus A320-232's, four vintage 1996 Boeing B757-222's, three vintage 1997-1998 Boeing B757-222ETOPS, seven vintage 1997 Boeing B777-200ER's, two vintage 1998 Boeing 777-200ER's and three vintage 1999 Boeing B747-422's. All but one of the aircraft were delivered new to United from Boeing and Airbus in the time frame indicated.
The equipment notes issued in the transactions are direct obligations of United and are secured by an interest in the aircraft. It is the opinion of counsel to United that the Indenture Trustee on behalf of the owners of the equipment notes will be entitled to the benefits under section 1110 of the U.S. Bankruptcy Code.
As additional security for the notes, irrevocable revolving credit agreements will be entered into providing for drawings to pay interest on the certificates on any three successive semi-annual payment dates. The liquidity facilities do not provide for drawings to pay for principal or premium on the certificates. In the event the liquidity facility is replaced with a facility from another institution, the new institution is required to have a Moody's short-term rating of Prime-1 and the new irrevocable liquidity facility will have substantially the form of the initial liquidity facility. The replacement facility may have a maturity date that is earlier than the current facility. In that circumstance, and if the replacement facility cannot be extended or replaced, then the facility will be fully drawn, up to the maximum available commitment, and the proceeds will be placed in a cash collateral account. The initial liquidity provider will be Westdeutsche Landesbank Girozentrale, New York Branch, which is rated Prime-1 by Moody's.
The ratings on the newly issued Enhanced Pass Through Certificates reflect the ability of the issuer to make timely payments of interest and ultimate payment of principal at a date no later than the legal final maturity date of the certificates. The ratings are based on the credit quality of United, as obligor under the notes, the value of the aircraft pledged as security for the equipment notes, and the credit support provided by the liquidity facilities. Any future changes in the underlying credit quality of United and its ratings, and/or material changes in the value of aircraft pledged as collateral, and/or changes in the status of the liquidity facilities or the credit quality of the liquidity provider could cause a change in the ratings of the securities being offered.
The ratings and the current review for possible downgrade reflect the current uncertainty surrounding the strength of United's balance sheet and cash flow. United's ratings were first placed under review for downgrade when it announced its proposed acquisition of US Airways for $4.3 billion in cash and assumption of all of US Airways debt obligations. Completion of the acquisition awaits the approval of the US Department of Justice. If completed, Moody's estimates that the newly combined entity will have a leverage substantially higher than United alone, and cash flow debt protective measures that are substantially weaker.
The review for downgrade also reflects concerns over the fundamental earnings of United. The company reported a loss on the third quarter of 2000 and announced that it anticipates continuing losses in the fourth quarter. The earnings difficulties are primarily the result of labor disruptions and higher fuel costs, both of which may be temporary. However, United's wage settlement with its pilots union has set the stage for requests for substantial wage increases from other union organizations. Dramatic wage increases across all employee groups would increase United's cost structure, perhaps to the point of being uncompetitive. At the same time, the company will need to deal with deteriorating levels of customer satisfaction which were generally low (compared to other US major airlines using Department of Transportation measurements) even before this summers operational difficulties. The major disruptions that occurred during the summer and that are continuing, although at much lower levels, will make rebuilding customer confidence a very difficult task. The combination of higher costs and lower customer satisfaction could easily lead to a sustained period of sub par earnings and deteriorating debt protective measures.
The ratings reflect United's size and global route structure, including its membership in the Star Alliance. As the world's largest airline with a powerful nationwide route structure and large market shares in Latin America, the Atlantic and Pacific, United is well positioned to meet the needs of an increasingly mobile customer base. It is highly focused on corporate customers, particularly those that fly most often and with premium priced tickets. While cash flow ratios have deteriorated dramatically in 2000, adjusted debt to adjusted capitalization has declined steadily since 1995.
Moody's anticipates that proceeds from this transaction, other borrowings and existing cash will be used to fund the anticipated US Airways acquisition. If the acquisition is not completed, United will absorb the cash over time in its capital spending plan.
United Airlines, Inc. and its parent UAL Corporation are Headquartered in Elk Grove Village, IL
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