Bankruptcy Court Reclassifies $248 Million in United Airlines Facility Lease Deals as Financings

BUSINESS WIRE - March 31, 2004

Fitch Ratings believes that yesterday's court decisions in the United Airlines' (United) bankruptcy proceedings regarding the treatment of the carrier's special facility bonds sets a troubling precedent which may weaken security provisions behind certain municipal leased-backed bonds, but potentially strengthen bondholder security on other lease structures and provide guidance for structuring future transactions as true leases. The ruling came in response to a motion filed by United in which the airline asked the bankruptcy court to determine if certain special facility bonds issued on the airline's behalf constituted a true lease subject to the provisions of Section 365 of the United States Bankruptcy Code, or instead were 'disguised financings' that should be treated by the court as unsecured debt of the airline.

The case involved five series of bonds issued to construct various facilities for the airline at four airports - Denver International (DEN), Los Angeles International (LAX), San Francisco International (SFO), and New York John F. Kennedy International (JFK) - totaling $510 million. The decision rendered yesterday does not address a second case that remains pending before the bankruptcy court regarding approximately $601.3 million in special facility bonds issued by the City of Chicago for United facilities at O'Hare International Airport.

As a result of this decision, bondholders in these four transactions may rank as unsecured creditors in the bankruptcy proceedings. Recoveries on unsecured claims, which rank near the bottom of the priority list under bankruptcy rules, are determined through the plan of reorganization approved by the bankruptcy court. Historically, recovery for unsecured creditors in airline bankruptcies is well below the value of their claims against the bankrupt's estate. For example, US Airways estimated unsecured creditors would receive stock and warrants in the reorganized company valued between 1.2% and 1.8% of their allowed claims when that airline emerged from bankruptcy in March 2003. However, United will maintain access to the facilities financed by these four transactions, provided it assumes the underlying leases with the airport sponsor.

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