Delta faces tricky task in restructuring debt

Thu Aug 19, 2004
By Dan Wilchins

NEW YORK, Aug 19 (Reuters) - Delta Air Lines (DAL.N: Quote, Profile, Research) is taking steps toward restructuring at least some of its roughly $20 billion of total debt in a bid to avoid bankruptcy, but it will face an uphill battle, analysts said on Thursday.

The airline, by one analyst's estimate, needs to shave $2 billion a year off its costs to avert a Chapter 11 filing, a path several of its competitors have been forced to take.

Delta met with its pilots union on Thursday as part of its continuing effort to get $1 billion in annual savings from pilots. But the rest of the cost savings will have to come from other sources -- either from other employees, through renegotiating debt or by the company changing how it operates.

"It's going to be a matter of sharing pain equally," said Matt Freund, a portfolio manager at USAA Investment Management Co. in San Antonio. USAA owns a type of Delta secured bond, enhanced equipment trust certificates that are generally expected to fare well during the restructuring process.

Delta is struggling with high jet fuel prices, high labor costs, and high borrowing costs. Domestically, it has trouble competing against low-cost carriers like Southwest Airlines (LUV.N: Quote, Profile, Research) , and internationally it doesn't offer enough long-haul routes, which tend to be the most profitable for full-service airlines, analysts said.

The company took initial steps toward restructuring some of its secured bonds, known as equipment trust certificates and pass-through certificates, on Wednesday, when it asked investors for the right to buy back roughly $1.5 billion of the securities.

Delta is also likely to restructure secured private leases and bank loans, which amount to about $5 billion of debt. Private deals are easiest to restructure because they involve the fewest parties, said Ron Bringewatt, head of research at distressed debt brokerage Seaport Group in New York.

MISERY LOVES COMPANY

But secured lenders might be unwilling to make concessions if unsecured lenders do not, said Alok Makhija, deputy head of research at distressed debt brokerage DebtTraders in New York.

Secured lenders are a little less fazed by the prospect of bankruptcy, because in a Chapter 11 reorganization secured lenders would be entitled to claim hard assets. Even if the value of the collateral for their loans and bonds was not enough to cover the face value of their investment, these lenders could file to file to recover the remaining amount and be on the same footing as unsecured lenders.

If secured lenders demand that the company seek concessions from unsecured lenders, Delta could be in for a logistical nightmare, analysts said. Scores of investors would have to sign off on agreement. Delta has about $4.5 billion of senior unsecured notes.

However difficult the restructuring process is, everybody has a strong incentive to keep the company out of bankruptcy, USAA's Freund said.

"The market has been through a few airline bankruptcies now, and it was so painful that no one wants to go there," Freund said.

UAL Corp.'s (UALAQ.OB: Quote, Profile, Research) United Airlines has been operating in bankruptcy since December 2002, and US Airways Group (UAIR.O: Quote, Profile, Research) emerged from Chapter 11 last year but has said it may go bankrupt again if it cannot cut costs further.

Delta has said concessions from its pilots, the highest paid in the industry, are a key piece in lowering overall costs.

Management on Thursday presented the pilots with details on proposed returns in exchange for union concessions. The company also clarified details on scheduling issues and retirement plan changes, the union said.

The union said it was reviewing the information. (Additional reporting by Meredith Grossman Dubner in Chicago)

 

 

 

 

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