CREDIT WEEK FOCUS
By Philip Baggaley, CFA
[font=arial,helvetica,univers]On Aug. 19, 2004, Standard & Poor's lowered its ratings on Delta Air Lines (DAL ), including a reduction in Delta's corporate credit rating to 'CCC' from 'CCC+', reflecting an increasing risk of an out-of-court restructuring of debt. The rating outlook is negative.if (!window.adOb) document.write(''); if (!adOb.commonAdVars) setAdProps("db", "", false);writeAd(adOb.pp9, "db_general_9.htm", "PP9", 1, 1);
On Aug. 18, Delta announced a consent solicitation seeking permission from holders of many equipment trust certificates and pass-through certificates (but not enhanced equipment trust certificates) to lift limitations on the airline's ability to buy and hold the certificates, in order "to provide Delta with greater flexibility to effect a successful out-of-court restructuring." Earlier, Delta CEO Gerald Grinstein, in a July 30, 2004, letter to Delta's pilots' union, said that management is "working hard to restructure debt, renegotiate aircraft leases, and reconstruct [the company's] relationship with vendors and suppliers" as part of a comprehensive turnaround plan.
Restructuring of bond payments or a coercive exchange would be considered a default and cause the company's corporate credit rating to be lowered to 'D' (default) or 'SD' (selective default). Ratings of equipment trust certificates and pass-through certificates were lowered two notches, to 'CCC', the same level as the revised corporate credit rating. Ratings of most senior classes of enhanced equipment trust certificates, which are considered more difficult to restructure outside of bankruptcy, were not lowered.
Delta's consent solicitation provides the clearest signal yet that the company will seek to restructure selected debt obligations outside of bankruptcy. The changes sought would make possible certain types of debt restructuring, such as a tender offer or exchange offer, if certificate-holders agree. Separately, Delta's CEO presented the conclusions of an extensive strategic review and recommended a turnaround plan to the company's Board of Directors. Details were not disclosed, but Grinstein said in a letter to employees that it would involve further pay and benefit cuts for all employees, and changes in the airline's routes, fleet, and fare structure. Delta announced on Aug. 19, 2004, a substantial fare cut and fare simplification at its Cincinnati, Ohio hub.
Delta's management is seeking substantial cost concessions from its pilots approaching or matching those achieved by airlines in or at the edge of bankruptcy. The pilots' union has offered concessions it values at about $700 million, while management says that the company needs a minimum of $1 billion of savings (higher than a previous target), which would include changes to the pilots' pension plan. Management has indicated that it would consider granting profit-sharing and/or an equity stake in the company in return. Delta's moves toward debt restructuring could help its chances of securing an agreement from the pilots by demonstrating that various stakeholders, not only employees, will bear sacrifices.
Liquidity: Liquidity, previously substantial, is dwindling rapidly, with $2.0 billion of unrestricted cash at June 30, 2004, down from $2.7 billion at December 31, 2003. The company indicated that it expects its cash position to decline at a similar rate during the second half of the year, which would imply year-end cash of $1.5 billion. Although this amount in itself would not necessarily trigger a bankruptcy filing, expectations of further cash losses during the seasonally weak first quarter might persuade Delta to file for Chapter 11 unless it had secured the labor concession it is seeking.
Debt maturities for the remainder of 2004, based on the most recent available information, total about $410 million ($290 million in the third quarter and $120 million in the fourth quarter), with a further $1.2 billion due in 2005. Delta expects to fund a further $50 million into pensions during 2004, after having contributed most of its required amounts earlier in the year. The company also forecasts $370 million of capital expenditures for the third quarter of 2004, of which $210 million is for regional jets (a "substantial" portion of which will be financed under existing commitments).
The company has no availability under credit lines, other than commitments to finance upcoming regional jet deliveries. These commitments do not have covenants that Delta is in danger of violating.
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Baggaley is a credit analyst for Standard & Poor's Ratings Services
