NEW YORK, June 29 (Reuters) - Bond investors are demanding
a high yield to take on even the secured debt of UAL Corp
(UAUA.O) as declining travel demand continues to hurt revenues
at the company, the parent of United Airlines, and raises the
risk its liquidity could come under stress. United Airlines on Friday sold $175 million in senior notes
backed by its U.S. aircraft spare parts.
The notes were priced
at 90 cents on the dollar to earn a yield of 17 percent,
according to Thomson Reuters data. "The pricing indicates lack of investor interest and
management desperation," CreditSights analysts Roger King,
Aidas Baublys and Brian Studioso said in a report on Monday. "Whether it was due to banker exuberance or company desperation is unclear, but this type of issuance is frequently
just a few steps from the grave.
It signifies that sources of
liquidity are up against a limit while investors have yet to
perceive any rising tide of seasonal demand," they said. UAL denies that the pricing of the debt sale was out of
line with general market conditions. "The transaction was oversubscribed with terms that reflect
the transaction structure, the nature of the collateral used
and the tight credit market," said UAL spokesperson Jean
Medina, in Chicago.
The sale "will further boost our liquidity as we continue
to take the right actions in response to the difficult
environment, adjusting capacity and reducing our cost
structure," she added. "We continue to take actions to raise
liquidity, having raised more than $500 million in the first
quarter alone." LIQUIDITY CONCERNS Concerns that UAL's liquidity could come under pressure
have increased as the outlook for travel demand remains bleak
and the risk of a renewed surge in fuel prices remains a risk.
Credit default swaps on UAL's debt are reflecting a high
bankruptcy concern at 59 percent the sum insured as an upfront
cost, or $5.9 million to insure $10 million for five years, in
addition to annual payments of $500,000, according to data by
Markit. Fitch Ratings this month cut UAL's issuer credit rating two
notches to CCC, eight steps below investment grade and a deeply
speculative grade.
United could report substantially negative free cash flow
for the final three quarters of 2009, and the airline has $655
million of debt and capital leases maturing in the last three
quarters of the year, Fitch said. "Even if revenue trends stabilize late in the year, the
airline faces over $1 billion in scheduled debt and capital
lease principal payments next year, raising the probability of
a deepening liquidity crisis," Fitch added.
Management has indicated that an estimated $1.7 billion in
remaining unencumbered assets could be used to improve
liquidity in the future, though much of these assets are older
aircraft and engines that may not be easily monetized, Fitch
said. "United may have difficulty raising a large amount of new
capital over the near term as credit market conditions remain
very tight," Fitch said. Meanwhile the ability of bondholders to obtain the parts
backing the recent debt sale in the event of bankruptcy may be
challenged, CreditSights said.
"The history of aircraft parts collateral in bankruptcy has
been spotty," and bondholders in a past case involving the
now-defunct TWA airline were wiped out when a bankruptcy judge
did not want to deal with commingled inventory, the analysts
said. "Given the inherent limitations of spare parts collateral,
bondholders are betting their principal investment that the
issuer will not default over the next three years. That does
not seem to be a good bet right now," CreditSights said.
MFG
Chali
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