CHICAGO — Delta Air Lines Inc. filed a Chapter 11 reorganization plan with the bankruptcy court yesterday that anticipates the elimination of at least $1.2 billion of its $1.7 billion of municipal debt while providing a payout of between 63% and 80% for bondholders reduced to the category of unsecured claimants.
The more than 180-page disclosure statement filed with the U.S. Bankruptcy Court for the Southern District of New York includes information on the status of the airline’s negotiations regarding repayment of some bond issues and how it intends to treat others — as unsecured or lease-backed — but leaves unclear the status on some leases and bond issues.
The reorganization plan does contain total overall figures of the municipal debt the airline hopes to discharge, but the ultimate classification of bonds and their compensation levels is not yet settled in some cases, while in other cases it is simply not addressed in the disclosure statement, making it difficult to discern the ultimate payout some bondholders can expect.
“Given the fact that some of the bond issues and leases are still subject to negotiation and possibly litigation, it’s not yet clear how all the bonds are going to be treated,” said Brian Tournier, head of the municipal research group at A.G. Edwards & Sons Inc.
The newly reorganized company would emerge from bankruptcy in mid-2007 with $15 billion of debt, including $558 million of special facilities revenue bonds on its books as a stand-alone company. The carrier’s board rejected the overtures of US Airways Group to merge in an $8.4 billion transaction.
The airline filed for Chapter 11 in September 2005.
“Delta’s board concluded that the company’s stand-alone plan will provide our creditors with superior value as well as a faster recovery and much greater certainty of execution than the US Airways proposal,” a statement from the company read. The firm expects to cut $3 billion in costs by the end of next year. As of Sept. 30, the airline had achieved 85% of its goal.
The US Airways bid offered unsecured bondholders a payout of roughly 54 cents on the dollar but it provided for a mix of cash and equity. While unsecured bondholders would receive more under the Delta plan, it appears that the payment would come in the form of a stock distribution — the value of which will depend on the market’s view of the new company.
Still, the payout represents a significant improvement over the single-digit figures unsecured creditors received under previous airline bankruptcy plans, such as United Airlines’.
“It has been dismal in past airline bankruptcies,” Tournier said. Tournier said he believes the US Airways bid forced Delta to sweeten its offer to creditors.
The Atlanta-based Delta outlined a five-year business plan in its filings with the court. The estimated equity value of the new company will stand between $9.4 billion and $12 billion and it would return to profitability by the end of next year.
“It’s a very strong plan that makes the case for Delta to remain a stand-alone company,” said Stephen Macklem of Island Creek Capital LLC, which invests in distressed debt but does not hold any Delta municipal bonds.
The airline entered bankruptcy with $1.8 billion of special facilities revenue bonds issued for projects at airports in Boston, Chicago, Dallas-Fort Worth, Atlanta, Salt Lake City, San Francisco, Los Angeles, and “certain other locations.” A total of $18.7 million in unpaid interest has accrued since the bankruptcy filing.
Delta is working to restructure its operations and lease obligations at many of those facilities with the goal of eliminating $1.2 billion of its special facilities revenue bonds from annual interest savings of $120 million. Approximately half of that debt is tied to airport leases.
The airline anticipates that it will emerge with approximately $558 million of special facilities revenue debt in principal amount due through 2035, according to the disclosure statement. The bonds that will remain on the airline’s books include issues that financed projects at airports in Atlanta, Chicago, Los Angeles, and “certain other locations.”
The airline anticipates classifying a total of $263 million of the $558 million of debt “as obligations under operating leases.” In those cases, bondholders could expect to recoup their full investment as the airline must repay the debt in order to remain in good standing on its leases.
The remaining debt will either be shed as a result of settlements or the airline will seek court approval to lump it in the unsecured pile.
Delta announced last week a settlement with the Massachusetts Port Authority, the Bank of New York, and Ambac Assurance Corp. that allows it to shed $498 million issued for a new terminal at Boston’s Logan International Airport from its books.
Rental payments from Delta and other airlines that will occupy the terminal along with various reserves are expected to cover debt service. The settlement agreement still needs court approval. “If the restructuring is approved by the bankruptcy court, the savings to Delta are expected to be substantial,” the disclosure statement reads.
The fate of Delta’s $413 million of outstanding bonds issued by the Kenton County, Ky., Airport Board for projects at the Cincinnati/Kentucky Airport are substantially more gloomy as negotiations to restructure the lease with the board and bond trustee UMB Bank NA have stalled.
“Recently, negotiations to finalize the settlement appear to have reached an impasse and there is no assurance that a settlement is still possible,” the airline reported. Delta has previously asked the court to reject the airport leases tied to bond repayment and the business plan anticipates a 30% reduction in the airline’s operations at the airport.
In addition to the MassPort and Kenton debt, the airline indicates that it considers $30 million of bonds sold through Fulton County in 1992 and $125 million issued in 1998 for projects at Atlanta’s Hartsfield-Jackson International Airport as an unsecured, pre-petition debt that also would be discharged. Delta also intends to attempt to classify its $117 million of bonds issued for projects at Dallas-Fort Worth International Airport in 1991 and another $26 million as unsecured debt that will be discharged.
The airline has rejected its maintenance lease at the Tampa airport, a move that should free it of the obligation to repay $8 million of bonds issued in 1993 through the Hillsborough County Aviation Authority. Delta has another $16 million of bonds issued in 2000 that were repaid because they were secured by a GE line of credit. Delta has rejected three leases related to $8.5 million of bonds issued for projects at Portland International Airport in 1992.
It is unclear how the airline’s $46 million of bonds sold for projects at Los Angeles International Airport through the Regional Airports Improvement Commission will eventually be treated. The airline sought to recharacterize its leases tied to bond repayment as disguised financings and not true leases. The distinction is significant in that obligation tied to a true lease that is then assumed must be repaid while financings often are lumped into the unsecured category. The dispute was put on hold pending court rulings in similar cases involving United Airlines’ debt. It is unclear whether Delta will pursue the recharacterization issue.
The reorganization plan does not address how the airline’s $96 million of bonds issued through the Port Authority of New York and New Jersey for projects at LaGuardia International Airport and $34 million for projects at Chicago’s O’Hare International Airport will be treated, but the first has a secured leasehold mortgage on airport facilities and the second a secured interest in the gates, so both are expected to be considered and fully paid.
