DJ Aircraft-Backed Debt/S&P -2: New Financings Difficult
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=DJ Aircraft-Backed Debt Hit By Depressed Plane Values - S&P
03 Feb 13:31
By Tom Barkley
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The prolonged slump in the airline industry, which has
already pushed two major carriers into bankruptcy, threatens to further impede
the financing options of the industry as a whole as aircraft continue to lose
value.
Standard & Poor's late Friday put the ratings of aircraft-back debt of
essentially all remaining U.S. airlines on review possible downgrade, citing
the "ongoing significant deterioration" in the value of planes that act as
collateral for a major funding source for the carriers.
The rating agency put the aircraft-backed debt of eight carriers on review,
bringing the total number of airlines facing possible downgrade to 11.
US Airways Group Inc. (UAWGQ) and United Airlines parent UAL Corp. (UAL) have
sustained multiple downgrades since filing for Chapter 11 protection last year,
while the ratings of American Airlines parent AMR Corp. (AMR) were put on
review for downgrade a week and a half ago.
In S&P's latest action, none of the eight airlines themselves are under
review, just their aircraft-backed debt. That group consists of Alaska Air
Group Inc. (ALK), America West Airlines Inc. (AWA), Atlantic Coast Airlines
Holdings Inc. (ACAI), Continental Airlines Inc. (CAL), Delta Air Lines Inc.
(DAL), FedEx Corp. (FDX), Northwest Airlines Inc. (NWAC) and Southwest Airlines
Co. (LUV).
Meanwhile, S&P on Monday put the triple-B rating of GATX Corp. (GMT), a
leasing company with significant exposure to the aircraft industry, on review
for downgrade. The rating agency cited weakness in all three of its businesses,
which also include railcar leasing and technology, adding that oversupply has
hurt aircraft lease rates.
"Nobody is left unscathed," S&P analyst Betsy Snyder told Dow Jones
Newswires. "The value of aircraft in general has just continued to decline. You
have oversupply, and that's not helping."
With UAL and US Airways rejecting many aircraft in their turnaround efforts,
"that puts more supply out there, so it's like a circle," she added.
(MORE) Dow Jones Newswires
02-03-03 1331ET
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=DJ Aircraft-Backed Debt/S&P -2: New Financings Difficult
03 Feb 15:40
US Airways and UAL have been aggressive in rejecting leases and negotiating
for lower rates. Under Section 1110 of the bankruptcy code, a carrier must
accept or reject aircraft leases within 60 days.
Most rejections have involved older aircraft and those backing equipment
trust certificates, which lack the third-party guarantees of enhanced equipment
trust certificates.
Nonetheless, US Airways, which filed for bankruptcy in August and plans to
emerge at the end of March, surprised investors Friday with plans to reject 29
newer Airbus (F.ABI) aircraft and a restructured agreement for new aircraft
with the plane manufacturer.
S&P analyst Philip Baggaley called the rejection of part of the carrier's
core Airbus fleet "significant," and the rating agency put US Airways' Series
1998-1 and 1999-1 passthrough certificates backed by some of those aircraft on
review for downgrade.
UAL has asked creditors for as much as a 50% reduction in lease rates since
its December filing, and last week sought court permission to reject six Boeing
Co. (BA) aircraft and engine leases that it says are too expensive.
With an estimated 1,800 aircraft parked in the desert due to oversupply,
plane values have fallen between 10% and 50% this year, depending on the type
and liquidity of the aircraft, Fitch Ratings estimated last month. Those prices
are unlikely to recover until 2005 at best, the rating agency said, and another
shock to the system could send down values to 30% to 70% below their pre-Sept.
11 numbers.
A continuation of depressed aircraft valuescould cut off a valuable funding
source for many airlines, said S&P's Snyder, warning that financial flexibility
could be "severely constrained."
"They won't have access to this type of financing, at least in the
intermediate term, because investors won't want to buy these types of
securities since they've gotten burned," added Snyder.
However, Mark Egan, managing director at Reams Asset Management, criticized
the rating agencies for not taking into account the cyclical nature of the
market for planes.
"While today prices are depressed, unquestionably, the real question is are
they permanently impaired, and to what extent, and what does that mean to
securities prices?" he said, adding that aircraft values don't have much of an
impact unless the airline goes bankrupt.
Still, issuing aircraft-backed debt would be difficult for most airlines
right now, with the possible exception of single-A-rated Southwest Airlines, he
agreed.
"The risk level is higher than it was before," added Egan. "People are still
pretty skittish from the last couple of years."
-By Tom Barkley, Dow Jones Newswires; 201-938-4385
tom.barkley@dowjones.com
(END) Dow Jones Newswires
02-03-03 1540ET |
