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Global Credit Research - 02 Aug 2010
$3.8 billion of rated debt or EETC's outstanding
New York, August 02, 2010 -- Moody's Investors Service raised its debt ratings of UAL Corporation ("UAL"):
Corporate Family and Probability of Default each to B3 from Caa1.
Moody's also upgraded the first lien senior secured ratings of the
$1.225 billion term loan due 2014, the $255
million revolving credit due 2012 and the $500 million notes due
2013 secured by the company's Japan routes each to B1 from B3,
the rating on the second lien senior secured notes due 2013, also
secured by the Japan routes to Caa1 from Caa2, and the rating on
the $175 million senior notes due 2012 secured by the company's
spare parts to Ba3 from B2. Moody's affirmed the Speculative
Grade Liquidity rating of SGL-2 and each of its ratings of the
Enhanced Equipment Trust Certificates ("EETC's") issued by
United Airlines, Inc. The ratings remain under review for
possible upgrade because of UAL's intention to merge with Continental
Airlines, Inc. ("CAL"), previously announced
on May 3, 2010. The merger, which is subject to closing
conditions, is expected to become effective on or before December
"The upgrade of the ratings recognizes the strengthening of liquidity
and credit metrics that has occurred since the beginning of 2010,"
said Moody's Airline Analyst, Jonathan Root. "UAL's
capacity discipline, well established position in the trans-Pacific
and geographically advantaged U.S. West Coast hubs have
helped UAL achieve significant improvements in operating metrics in the
first half of 2010, which has led to strong growth of earnings and
of free cash flow", continued Root. The upgrades also
reflect Moody's anticipation of a supportive demand environment
and measured capacity growth by most of U.S. carriers in
upcoming quarters. These factors should, in the near term,
help limit potential downwards pressure on the operating performance and
credit metrics of UAL (and the other U.S. legacy carriers).
The B3 Corporate Family rating reflects the company's significantly improved
cash balance and stronger credit metrics profile. UAL is a leading
global carrier with an entrenched position in the trans-Pacific
that has led to significantly improved consolidated operating performance
during the first half of 2010. Moody's estimates that credit
metrics in upcoming quarters are likely to remain indicative of the single-B
rating category, notwithstanding that it expects year-on-year
growth of airline operating metrics to slow because of more difficult
comparisons and the potential for a modest slowdown in premium demand.
The B3 rating considers Moody's estimate that the barrel price of
oil is likely to remain below $90 in upcoming quarters, which
should prevent the recurrence of the high-fuel price induced stress
on UAL's (and its industry peers') liquidity and credit metrics
that took place in 2008 and 2009. Please see page 6 of Moody's
Industry Outlook for the Global Integrated Oil industry published on July
28, 2010 available on moodys.com for its current oil price
assumptions. Manageable calls on cash, with modest capital
expenditures mainly for updates to aircraft interiors of the existing
fleet, no aircraft deliveries before 2016 and manageable debt maturities
including $876 million of convertible notes that are puttable in
2011, for which UAL has the option to settle with shares,
support the ratings.
Moody's has left the ratings on review for possible upgrade because
of the potential credit benefits of combining the operations of UAL and
CAL. Labor cost levels of still to be agreed union contracts,
the post-merger legal and debt structures and the ability to successfully
integrate the operations are key factors that will determine the combined
company's post-merger credit profile. Because the
companies expect the transaction to close by the end of the fourth quarter
of 2010, Moody's will continue to monitor developments with
respect to UAL's stand-alone credit profile. The affirmation
of the EETC ratings reflects the uncertainty about the post-merger
fleet strategy and the potential effect on market values if the combined
company was to de-emphasize one or more aircraft models that represent
significant portions of the aircraft in its EETCs.
Moody's anticipates little upwards or downwards pressure on the
ratings before the closing of the merger. The current level of
demand and modest capital expenditures should allow for the generation
of a significant amount of positive free cash flow that would be available
to fund upcoming debt maturities and not impair the company's unrestricted
cash position. Although this could lead to lower leverage,
the company's high operating leverage in the Pacific leaves earnings
and credit metrics subject to weakening during cyclical troughs in passenger
demand. Debt to EBITDA that is sustained below 4.5 times,
Funds from Operations + Interest to Interest that remains above 3.5
times or Free cash flow to Debt in excess of 10% could exert one
notch of upwards pressure on the stand-alone ratings. The
ratings could face downwards pressure of at least one notch if the cost
of jet fuel was to significantly increase above $2.60 per
gallon or if unrestricted cash fell below $3.0 billion.
The generation of negative free cash flow, Debt to EBITDA of more
than 6.5 times or Funds from operations + interest to interest
of below 2.0 times could also negatively affect the ratings,
as could the decline of unrestricted cash to below $3.5
billion. Moody's could conclude the review with an upgrade
of the ratings if the post-merger labor costs and terms pursuant
to new union contracts for the various work groups are competitive with
those of its industry peers and the U.S. regulatory review
does not require the carriers to divest a significant number of routes
or hubs in the U.S. The inclusion of upstream and downstream
guarantees of each other's debt obligations could also positively
affect ratings on certain instruments as determined by Moody's Loss
Given Default Rating Methodology.
The principal methodology used in rating UAL is Moody's Global Passenger
Airlines, published in March 2009 and available on www.moodys.com
in the Rating Methodologies sub-directory under the Research &
Ratings tab. Other methodologies and factors that may have been
considered in the process of rating UAL can also be found in the Rating
Methodologies sub-directory on Moody's website.
The last rating action on UAL was on May 3, 2010 when Moody's placed
all of its ratings of UAL on review for upgrade.
..Issuer: Denver (City & County of) CO
....Senior Unsecured Revenue Bonds,
Upgraded to Caa1, LGD5, 71% from Caa2, LGD5,
..Issuer: UAL Corporation
....Probability of Default Rating, Upgraded
to B3 from Caa1
....Corporate Family Rating, Upgraded
to B3 from Caa1
..Issuer: United Air Lines, Inc.
....Senior Secured Bank Credit Facility,
Upgraded to B1, LGD2, 27% from B3, LGD3,
....Senior Secured Regular Bond/Debenture,
Upgraded to Ba3, LGD4, 64% from B2, LGD5,
United Air Lines, Inc. and its parent, UAL Corporation,
are based in Chicago, Illinois. United is one of the largest
passenger airlines in the world.
Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrades UAL Corp; CFR to B3; ratings remain on review for further upgrade
250 Greenwich Street
New York, NY 10007
No Related Data.
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