(Source: Business Wire)
Fitch Ratings has assigned a rating of 'C/RR6' to UAL Corp.'s (UAL) $300
million senior convertible note issue. The notes, which are guaranteed
by UAL's principal operating subsidiary, United Airlines, Inc., mature
in 2029 and carry a coupon of 6%. Holders have the right to put the
notes back to the company at par on Oct. 15, 2014 (as well as the same
date in 2019 and 2024). Holders also have the right to require
repurchase of the notes at par if the company undergoes a fundamental
change, defined to include a change in majority ownership of the company
but excluding certain restructuring events. The Issuer Default Rating
(IDR) for both UAL and United is 'CCC'.
The closing of the convertible notes deal, together with an issuance of
at least 19 million shares of common stock, is expected to generate net
cash proceeds of approximately $424 million after deducting offering
expenses. This represents an important liquidity-raising step for the
airline as it looks to bolster cash balances in advance of the
seasonally weak demand period in the fourth and first quarters. Barring
a reversal of recent demand strengthening trends moving into the winter,
Fitch believes that UAL's recent capital markets activity puts it in a
position to avoid a liquidity crisis in early 2010.
Following the completion of the convertible debt and equity
transactions, UAL is likely to report unrestricted cash balances near $3
billion. Taking into account heavy debt and capital lease maturities
over the next several quarters, the airline should still manage to
maintain liquidity above $1.5 billion. Moving into 2010, moreover, as
improving macroeconomic trends begin to drive somewhat better high-fare
business travel demand, passenger unit revenue trends are likely to
improve. This should put UAL and the other large U.S. airlines in a
better position to return to positive free cash flow next year.
In its Sept. 16 investor update, UAL noted that it expects third quarter
mainline revenue per available seat mile (RASM) to fall by 17.8% to
18.8% year-over-year. This suggests that no meaningful snap-back in
yields has taken place during the quarter, though some sequential
improvement in RASM comparisons throughout the quarter likely was
achieved. The carrier's cost guidance indicated that non-fuel unit
operating expenses were likely to be flat to down slightly for the third
quarter, reflecting a continuation of generally good cost management
results during 2009.
In evaluating the potential for a cash flow turnaround and progress
toward de-leveraging over the next few months, Fitch will focus on the
pace of improvements in business travel demand and evidence of a
continuation of moderating year-over-year declines in passenger yields
and RASM. While signs of a nascent economic recovery support the case
for modest RASM growth in 2010, the economy remains fragile and risks of
follow-on revenue shocks persist. As a result, no positive rating
actions for UAL and United are likely in the near term.
Additional information is available at www.fitchratings.com.
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