Moody's reviews debt ratings of Delta and Northwest for possible downgrade
Approximately $6.9 billion of aggregate debt affected
New York, April 15, 2008 -- Moody's Investors Service placed the debt ratings of Delta Air Lines,
Inc. ("Delta", corporate family at B2) and Northwest
Airlines Corporation ("Northwest", corporate family
rating at B1) on review for possible downgrade. The review was
prompted by the announcement that the two airlines have agreed to combine
in an all-stock transaction with a combined enterprise value of
approximately $18 billion (according to the companies).
Moody's review period may be lengthy, given the time for the
necessary regulatory and shareholder approvals to effect the corporate
merger. Moreover, there could be a considerable additional
time period to effect actual integration of the airlines, which
is the basis for achieving the expected operating synergies. The
all-stock nature of the transaction is viewed favorably as it precludes
the need for incremental debt that would need to be serviced by the combined
airline operation. Nevertheless, the extended timeframe over
which cost and revenue synergies might be achieved, and the significant
hurdles that will need to be overcome to realize these synergies are critical
concerns that will be assessed in the review.
Separately, both carriers are facing material near-term operating
pressures from high fuel and maintenance costs and weakening passenger
traffic that impair their ability to realize adequate yields on ticket
prices. Even with the benefits of the bankruptcy restructurings
recently completed by both airlines, the current industry conditions
will likely make it difficult for either carrier to earn an adequate profit.
Successful implementation of the merger and realization of all expected
synergies could help the combined carriers deal with these challenging
conditions. Yet the synergies will only be realized over an extended
period of time, and with the expectation of near term net losses,
combined with the still substantial debt load (Delta at $17.6
billion; Northwest at $15.3 billion, using Moody's
standard adjustments), Moody's could take interim downward
rating actions on either carrier's debt prior to completing the
review.
Moody's will examine the timing and the magnitude of the various
cost and revenue synergies anticipated, and the degree to which
these incremental gains will affect credit metrics and enable the new
company to realize adequate returns. Particularly important will
be the ability to effectively integrate the workforces of Delta and Northwest,
and combine the seniority list in a way satisfactory to the work force,
especially the pilots. The review will also consider the degree
to which each airline can preserve its liquidity during the challenging
near term operating conditions, prior to effecting the merger.
The merger does not contemplate additional debt, which is helpful.
In addition, the four way anti-trust immunity (Delta,
Northwest, KLM, AirFrance) is also helpful as the airlines
operate with broader code-share arrangements. There is limited
overlap in the domestic network, and Northwest's strength
in Pacific routes (particularly the Fifth Freedom rights in Japan) complement
Delta's service in Europe and elsewhere. However, Moody's
is skeptical that simply joining the route networks will create the revenue
synergies needed to generate an adequate return. Cost savings,
anticipated to reach a run-rate of about $1 billion by 2012,
could be challenging in light of unresolved labor negotiations,
and the negative pressures from fuel and maintenance costs. Both
airlines have aging fleets that are less efficient to operate in the current
high fuel cost environment. The airlines have a limited number
of new aircraft on order and will need to consider the considerable capital
costs associated with refleeting.
The secured debt ratings of Delta and Northwest, including Enhanced
Equipment Trust Certificates (EETCs), but excluding ratings supported
by monoline insurance policies, will be reviewed in relation to
the review of the underlying implied rating as well as to the asset values
of aircraft equipment that provide collateral support for the transactions.
The potential ratings actions for these transactions may be of greater
or less magnitude than a change in the underlying airline rating,
if any.
On Review for Possible Downgrade:
..Issuer: Delta Air Lines, Inc.
....Probability of Default Rating, Placed
on Review for Possible Downgrade, currently B2
....Speculative Grade Liquidity Rating,
Placed on Review for Possible Downgrade, currently SGL-2
....Corporate Family Rating, Placed
on Review for Possible Downgrade, currently B2
....Senior Secured Bank Credit Facility,
Placed on Review for Possible Downgrade, currently Ba2 (19%
- LGD2)
....Senior Secured Bank Credit Facility,
Placed on Review for Possible Downgrade, currently Ba2 (19%
- LGD2)
....Second Lien Term Loan, Placed on
Review for Possible Downgrade, currently B2 (46% -
LGD3)
....Series 2007-1 Pass Through Certificates,
Placed on Review for Possible Downgrade:
Class A, currently Baa1
Class B, currently Ba2
Class C, currently B1
..Issuer: Northwest Airlines Corporation
....Probability of Default Rating, Placed
on Review for Possible Downgrade, currently B1
....Speculative Grade Liquidity Rating,
Placed on Review for Possible Downgrade, currently SGL-2
....Corporate Family Rating, Placed
on Review for Possible Downgrade, currently B1
..Issuer: Northwest Airlines, Inc.
....Senior Secured Bank Credit Facility,
Placed on Review for Possible Downgrade, currently Ba3 (41%
- LGD3)
....Senior Secured Bank Credit Facility,
Placed on Review for Possible Downgrade, currently Ba3 (41%
- LGD3)
....Series 2007-1 Pass Through Certificates,
Placed on Review for Possible Downgrade:
Class A, currently A3
Class B, currently Ba1
Outlook Actions:
..Issuer: Delta Air Lines, Inc.
....Outlook, Changed To Rating Under
Review From Stable
..Issuer: Northwest Airlines Corporation
....Outlook, Changed To Rating Under
Review From Stable
..Issuer: Northwest Airlines, Inc.
....Outlook, Changed To Rating Under
Review From Stable
Delta Air Lines, Inc. is headquartered in Atlanta,
Georgia.
Northwest Airlines Corp. is headquartered in Eagan, Minnesota.
New York
George Godlin
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653