S & P Warns of Multiple Airline Bankruptcies
02-24-2005, 03:18 PM
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S & P Warns of Multiple Airline Bankruptcies
S&P Warns of Airline Bankruptcies
Thursday February 24, 5:49 pm ET
S&P Warns Terrorism, Fuel Prices, Pension Liabilities Could Trigger Airline Bankruptcies
NEW YORK (AP) -- The risk of multiple, simultaneous bankruptcies in the U.S. airline industry is growing, according to credit ratings agency Standard & Poor's, and could be triggered by renewed terrorism, a spike in fuel prices or pension liabilities.
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Credit analyst Philip Baggaley Thursday warned that "the breadth of credit deterioration" in the airline sector, despite the economic upturn in the United States, indicates that credit profiles won't rebound as they did in the 1990s after a similar downturn.
The "very prolonged" -- even indefinite -- difficult airline environment in the United States has weakened almost all U.S. carriers, he said, due to high fuel prices, excess capacity and intense price competition in the domestic market.
What's more, the pension obligations of the legacy carriers -- those high-cost airlines that were deregulated in the 1970s and are now reeling from more nimble, cutthroat competition -- could create "a domino effect" of bankruptcies as they seek to lighten the pension load and become more competitive.
The dire warnings from Baggaley didn't come as a surprise to the high-yield market.
"This is different than other economic situations," said Raymond Neidl, airline and aerospace equity and bond analyst at Calyon Securities in New York.
The balance sheets of the legacy carriers "are a mess," he said, adding that the government will likely have to change its antitrust stand to allow more partnerships between the bigger players.
The legacy carriers "don't dominate any longer," he said.
And even the safest types of investments in this volatile industry -- debt backed by aircraft -- could run into problems in a scenario of multiple bankruptcies. In that event, holders of this type of debt -- considered super-safe because it is backed by real assets -- could be less able to enforce their claims to full repayment from bankrupt airlines, according to S&P.
As a result, S&P Thursday placed its ratings on equipment trust certificates and enhanced equipment trust certificates of America West Airlines Inc., AMR Corp.'s American Airlines Inc., Continental Airlines Inc. and Northwest Airlines Inc. on Credi****ch with negative implications.
A total of $13 billion of securities are affected, S&P said.
In announcing its rating review, S&P also cited concerns about the continued court wrangling between UAL Corp.'s United Air Lines Inc. unit and a group of its creditors regarding their right -- and the right of lessors -- to repossess aircraft in United's bankruptcy case, now more than two years old.
United is challenging the right of the Chapman Group of creditors, which controls 175 of United's planes, to repossess 14 aircraft that have been used as collateral to back debt, alleging they are colluding with a broader group of aircraft creditors in violation of antitrust law.
But under the U.S. Bankruptcy Code, secured creditors have the right to repossess planes 60 days after the bankruptcy filing if they are not being paid in full, a right that is not limited by any other provision of the title or by any power of the court.
United won a temporary restraining order barring the creditors from repossessing the planes -- prompting S&P last December to warn that $30 billion of airplane-backed bonds sector-wide could eventually be downgraded depending upon the outcome of the court case.
Thursday February 24, 5:49 pm ET
S&P Warns Terrorism, Fuel Prices, Pension Liabilities Could Trigger Airline Bankruptcies
NEW YORK (AP) -- The risk of multiple, simultaneous bankruptcies in the U.S. airline industry is growing, according to credit ratings agency Standard & Poor's, and could be triggered by renewed terrorism, a spike in fuel prices or pension liabilities.
ADVERTISEMENT
Credit analyst Philip Baggaley Thursday warned that "the breadth of credit deterioration" in the airline sector, despite the economic upturn in the United States, indicates that credit profiles won't rebound as they did in the 1990s after a similar downturn.
The "very prolonged" -- even indefinite -- difficult airline environment in the United States has weakened almost all U.S. carriers, he said, due to high fuel prices, excess capacity and intense price competition in the domestic market.
What's more, the pension obligations of the legacy carriers -- those high-cost airlines that were deregulated in the 1970s and are now reeling from more nimble, cutthroat competition -- could create "a domino effect" of bankruptcies as they seek to lighten the pension load and become more competitive.
The dire warnings from Baggaley didn't come as a surprise to the high-yield market.
"This is different than other economic situations," said Raymond Neidl, airline and aerospace equity and bond analyst at Calyon Securities in New York.
The balance sheets of the legacy carriers "are a mess," he said, adding that the government will likely have to change its antitrust stand to allow more partnerships between the bigger players.
The legacy carriers "don't dominate any longer," he said.
And even the safest types of investments in this volatile industry -- debt backed by aircraft -- could run into problems in a scenario of multiple bankruptcies. In that event, holders of this type of debt -- considered super-safe because it is backed by real assets -- could be less able to enforce their claims to full repayment from bankrupt airlines, according to S&P.
As a result, S&P Thursday placed its ratings on equipment trust certificates and enhanced equipment trust certificates of America West Airlines Inc., AMR Corp.'s American Airlines Inc., Continental Airlines Inc. and Northwest Airlines Inc. on Credi****ch with negative implications.
A total of $13 billion of securities are affected, S&P said.
In announcing its rating review, S&P also cited concerns about the continued court wrangling between UAL Corp.'s United Air Lines Inc. unit and a group of its creditors regarding their right -- and the right of lessors -- to repossess aircraft in United's bankruptcy case, now more than two years old.
United is challenging the right of the Chapman Group of creditors, which controls 175 of United's planes, to repossess 14 aircraft that have been used as collateral to back debt, alleging they are colluding with a broader group of aircraft creditors in violation of antitrust law.
But under the U.S. Bankruptcy Code, secured creditors have the right to repossess planes 60 days after the bankruptcy filing if they are not being paid in full, a right that is not limited by any other provision of the title or by any power of the court.
United won a temporary restraining order barring the creditors from repossessing the planes -- prompting S&P last December to warn that $30 billion of airplane-backed bonds sector-wide could eventually be downgraded depending upon the outcome of the court case.
02-24-2005, 05:55 PM
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That last sentence is going be the kicker:
"United won a temporary restraining order barring the creditors from repossessing the planes -- prompting S&P last December to warn that $30 billion of airplane-backed bonds sector-wide could eventually be downgraded depending upon the outcome of the court case."
If the Chapman Group prevails, which it looks as though have legal grounds to do so, the market cap of the entire sector could suffer a huge devaluation.
"United won a temporary restraining order barring the creditors from repossessing the planes -- prompting S&P last December to warn that $30 billion of airplane-backed bonds sector-wide could eventually be downgraded depending upon the outcome of the court case."
If the Chapman Group prevails, which it looks as though have legal grounds to do so, the market cap of the entire sector could suffer a huge devaluation.
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