CHICAGO — A federal bankruptcy court judge on Friday approved United Airlines’ reorganization plan, setting the stage for the airline’s emergence from Chapter 11 early next month that will lead to bondholders recouping some small portion of the $1.7 billion invested in the carrier’s special facilities revenue bonds.
“Three years ago United was in danger of dying,” but through using Chapter 11 to restructure “once again it has the potential to be a profitable investment, a reliable business partner and a stable employer,” said U.S. Bankruptcy Court Judge Eugene Wedoff, who presides in the Northern District of Illinois located in Chicago.
Some bondholders could soon receive payments as laid out in the reorganization plan while others will have to wait for the final outcome of pending litigation. The airline’s bonds were sold in 18 series to finance the acquisition or construction of facilities at airports in Chicago, Boston, Denver, Indianapolis, Los Angeles, Miami, New York City, and San Francisco.
United initially asserted that all of its debt should be lumped into the category of unsecured claims that would not be repaid during bankruptcy. That wasn’t disputed on $600 million of the bonds issued for projects at the Boston, Indianapolis, and Los Angeles airports because the financings were structured as loans without any security or because the airline had rejected its leases tied to the financings.
The reorganization plan that received final approval Friday calls for all parties in the category of unsecured claimants, including the unsecured bondholders, to receive four to eight cents on the dollar in the form of new common stock to be issued by the reorganized United. That common stock could potentially be much more valuable for bondholders, as indicated by the Airline Pilots Association’s recent auction of $720 million of its $3 billion of approved claims against United.
The pilot union’s members opted to sell a portion of the unsecured claim prior to its conversion to common stock. Deutsche Bank purchased the claims for 24 cents on the dollar, according to a union representative.
“What that seems to show is that the market now appears to think United’s common stock is worth more than what it was valued at in the reorganization plan,” said one market participant following United’s bankruptcy. The four to eight cents payout was based on United’s financial adviser Rothchild’s valuation of the new company at $1.9 billion.
After United’s bankruptcy hearing Friday, United’s chief financial officer Jake Brace was optimistic that both the Rothchild’s valuation and the recent union sale would “prove to be wrong” with the airline exceeding both figures. The airline has shed $7 billion in costs, through reduced labor expenses, the elimination of its pension plans, and other structural changes.
While the airline was not challenged when it halted repayment on $600 million of its debt, the managers of various airports and bond trustees representing holders of the other $1.1 billion of debt argued that bond repayment was an obligation of the airline’s leases. United countered that for the purposes of bankruptcy the subleases crafted as part of the financings were not “true” leases, but disguised financial arrangements.
The reorganization plan moves holders of $600 million of bonds issued for projects at Chicago’s O’Hare International Airport approval of closer to receiving payment. They are set to receive what other unsecured creditors will under the reorganization plan — four to eight cents on the dollar — for their holdings, in addition to proceeds of a settlement plan with the airline.
Under the previously approved settlement, UAL will issue new bonds totaling $144.5 million. The complex agreement divides the new securities into chunks that vary in size to be distributed among the holders of each of the seven O’Hare series, so some fare better than others. Some bondholders also must choose between the new securities or a distribution of remaining bond proceeds in construction and reserve funds.
Litigation remains outstanding regarding about $466 million of that debt issued for projects at Denver International Airport, Los Angeles International Airport, and San Francisco International Airport, and appeals are pending before the 7th Circuit Court of Appeals in Chicago. Brace said Friday that the airline remains hopeful it will prevail in at least some of the cases, but its business plan contemplates the loss of those revenues. With the lease/loan dispute still unsettled, the airport sector will continue following the case because of its impact on the future structure and worth of special facilities revenue bonds.
Oral arguments before the 7th Circuit on $260 million of Denver airport project bonds and $59 million of Los Angeles Airport project bonds are scheduled for Feb. 16. An appellate panel has previously ruled that the airline’s $155 million of bonds at the San Francisco airport are not the product of a lease agreement but that of a loan, and are therefore unsecured.
The trustee — HSBC Bank USA — has requested the Supreme Court hear the case. The panel ruled similarly in a case involving $34 million of bonds issued for projects at New York City’s John F. Kennedy Airport, but that case has not been appealed, leaving just the three cases open.
The appellate court has so far based its rulings on a review of the bond subleases’ “economic substance,” turning to applicable state law to determine whether the structure of the lease meets the criteria of a state’s definition. The distinction between a loan and a lease obligation is significant in bankruptcy as loans or financing arrangements fall under the category of an unsecured credit while a lease must be accepted or rejected, and if accepted made good on.
The LAX and SFO bondholders also stand to recoup more because the original documents were filed with the proper state authorities under the federal Uniform Commercial Code, a move that perfects the secured leasehold interest of bondholders. That means even if the courts recharacterize both as loans, not leases, the leasehold interest has some worth though its value has not yet been determined by the bankruptcy court.
Another outstanding issue still to be decided is litigation between United and Chicago in which the city contends that United lost its exclusivity rights to its gates and facilities at O’Hare when it defaulted on the $600 million debt.
Wedoff said he expects to rule on that matter next month. The airline contends that its business plan would suffer should it lose the exclusive rights status — which gives the airline sole control over its facilities. The city has argued that the change to preferential status — which requires an airline meet certain usage thresholds — would simply give it more flexibility to manage the airport should United’s passenger or flight levels fall.
The airline has not yet announced its new ticker symbol or on what exchange it plans to list its stock.
