FlyBoeingJets
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Most Delta Creditors Could End Up at the Back of the Line
Friday April 14, 2:59 am ET
Andy Peters, Fulton County Daily Report
If a federal bankruptcy judge decides in the coming days that a pilot strike at Delta Air Lines Inc. has irreparably crippled the carrier, companies that Delta owes money to, such as The Boeing Co., IBM and Michelin North America Inc., may find themselves with little recourse.
The legal options available to Delta's creditors are extremely limited. A liquidation would offer only pennies on the dollar for most creditors.
"All you could do is stick your head in the corner and cry," said William J. Rochelle III, a partner at Fulbright & Jaworski who represents Boeing, one of the largest creditors in Delta's bankruptcy. Boeing has a complex arrangement of debt agreements with Delta, based on leases for current planes, agreements to purchase future aircraft and other financing arrangements.
Delta's individual assets could fetch billions of dollars, but the airline is worth far more alive than dead, which is why virtually all creditors want to avoid a liquidation, said C. David Butler, a former trustee for bankruptcy courts in Georgia and Florida.
It's likely that Delta, in liquidation, would have a difficult time selling its planes and its aircraft leases on the open market.
"You put that many used planes on the market, [and] the value of the planes would really collapse," said Butler, of counsel at Shapiro Fussell.
Some of Delta's creditors need not worry about getting their money back. General Electric Capital, Morgan Stanley and American Express Travel Related Services Co. teamed up to provide Delta with the financing the airline needed to weather the period of Chapter 11 bankruptcy reorganization. They will be first in line to get paid when Delta settles its debts.
Those with unsecured debt will wait in a long line. They include Atlanta companies The Coca-Cola Co. and BellSouth Corp.
Other creditors are represented by Atlanta law firms and attorneys. John A. Christy, a partner at Schreeder, Wheeler & Flint, represents a group of retired Delta pilots owed retirement pensions and benefits.
Edward F. Danowitz Jr. of Danowitz & Associates represents electrical and plumbing-supplies distributor Noland Co.
James A. Pardo Jr., a partner at King & Spalding, represents Commerzbank AG and Pitney Bowes Credit Corp., two companies that are leasing aircraft to Delta.
The city of Atlanta, which owns Hartsfield-Jackson Atlanta International Airport and has millions of taxpayer dollars at stake, is represented by in-house attorney Linda K. DiSantis as well as Amy Edgy Ferber, an associate at King & Spalding.
One of the biggest potential creditors is the Pension Benefit Guaranty Corp., the federal agency that assumes administration of distressed private pension plans. Funded by U.S. taxpayer money, the PBGC may have to take responsibility for paying pensions if company management is successful in talking its pilots into agreeing to the termination of the pension plan.
In exchange for approval to transfer the pension plan to PBGC, which would pay less retirement benefits than Delta, the pilots would get about $330 million in future considerations.
WILL DELTA BE SOLD?
Depending on their investment strategy, the GE/Morgan Stanley/American Express team has several options available. The group could decide to sell Delta, lock, stock and barrel, to another airline, or they could also accept a buyout offer from an outside investor.
In August 2005, for example, maverick financier Carl C. Icahn bought all of textile-maker WestPoint Stevens Inc., which was operating in Chapter 11, for $703.5 million. Icahn outbid rival financier Wilbur L. Ross, who offered $643 million, for the West Point, Ga.-based company.
It's unlikely that an investor would want to buy all of Delta's assets in one fell swoop, Rochelle said. Instead, certain assets would probably be snapped up more quickly than others.
One of those assets is Delta's operating certificate from the Federal Aviation Administration. Northwest Airlines Corp. recently agreed to pay $2 million for the operating certificate of Independence Air Inc., which recently liquidated.
Northwest bought the operating certificate with plans to run Independence as a separate airline. The process of obtaining an FAA certificate for a new airline would take much longer than buying one from a defunct airline, Rochelle said.
"With that certificate, you can jump through FAA hoops more quickly and get the airline back into operation much more quickly," he said.
WHAT IS DELTA WORTH?
If Delta is liquidated, determining how much the company is worth is far from an exact science.
That's partly because Delta has not yet filed a detailed statement of its assets and liabilities with the U.S. Bankruptcy Court in the Southern District of New York. The company was supposed to have submitted that document soon after it filed for bankruptcy on Sept. 14. But Delta has been granted three extensions.
It's also difficult to place a value on Delta's aircraft because many of the planes are tied up in complex lease arrangements. Some individual planes are owned by multiple lenders and lessors, said Darryl S. Laddin, a partner at Arnall Golden Gregory.
"You seldom see a situation in which one entity owns the whole airplane free and clear," Rochelle said.
Delta has provided a broad sketch of its assets. The company estimates its flight equipment is worth about $11.9 billion and that its ground property and equipment are worth about $1.9 billion, according to a bankruptcy court filing.
If a pilot strike is averted at Delta, the prospects for unsecured creditors are not entirely bleak.
When United Airlines emerged from bankruptcy protection, the company estimated it would only be able to pay its unsecured creditors 4 cents to 8 cents on the dollar in the form of new United stock. Shares of United on Wednesday morning traded at $38.94 per share, amounting to about 20 cents on the dollar.
In the event of a Delta liquidation, there still will be plenty of work for lawyers to do, although not necessarily the law firms currently assigned to the case.
Davis Polk & Wardwell, which is guiding Delta through Chapter 11 reorganization, could be displaced by another firm as lead legal counsel during a liquidation, depending on how Judge Adlai S. Hardin Jr. rules.
"It would be a tremendous struggle," Butler said.
Hardin could decide to convert Delta's bankruptcy from Chapter 11 to Chapter 7, in which case he would appoint a new trustee. That trustee could decide to hire a new law firm to represent him, said Laddin, who has served as a federal bankruptcy trustee.
Delta's current law firms, including Davis Polk & Wardwell and Alston & Bird, would be paid for the work they've done but would lose out on the future work of conducting the liquidation, Laddin said.
Although it's possible that Atlanta could soon face a life without Delta Air Lines, talk of a pilot strike at Delta is probably premature, said Schreeder, Wheeler & Flint's Christy, who represents retired pilots.
"A strike would be a crippling blow from which they could not recover," Christy said. "Both [management and the pilots' union] are smart enough to realize that, and they'll make a typical 11th-hour deal."
Friday April 14, 2:59 am ET
Andy Peters, Fulton County Daily Report
If a federal bankruptcy judge decides in the coming days that a pilot strike at Delta Air Lines Inc. has irreparably crippled the carrier, companies that Delta owes money to, such as The Boeing Co., IBM and Michelin North America Inc., may find themselves with little recourse.
The legal options available to Delta's creditors are extremely limited. A liquidation would offer only pennies on the dollar for most creditors.
"All you could do is stick your head in the corner and cry," said William J. Rochelle III, a partner at Fulbright & Jaworski who represents Boeing, one of the largest creditors in Delta's bankruptcy. Boeing has a complex arrangement of debt agreements with Delta, based on leases for current planes, agreements to purchase future aircraft and other financing arrangements.
Delta's individual assets could fetch billions of dollars, but the airline is worth far more alive than dead, which is why virtually all creditors want to avoid a liquidation, said C. David Butler, a former trustee for bankruptcy courts in Georgia and Florida.
It's likely that Delta, in liquidation, would have a difficult time selling its planes and its aircraft leases on the open market.
"You put that many used planes on the market, [and] the value of the planes would really collapse," said Butler, of counsel at Shapiro Fussell.
Some of Delta's creditors need not worry about getting their money back. General Electric Capital, Morgan Stanley and American Express Travel Related Services Co. teamed up to provide Delta with the financing the airline needed to weather the period of Chapter 11 bankruptcy reorganization. They will be first in line to get paid when Delta settles its debts.
Those with unsecured debt will wait in a long line. They include Atlanta companies The Coca-Cola Co. and BellSouth Corp.
Other creditors are represented by Atlanta law firms and attorneys. John A. Christy, a partner at Schreeder, Wheeler & Flint, represents a group of retired Delta pilots owed retirement pensions and benefits.
Edward F. Danowitz Jr. of Danowitz & Associates represents electrical and plumbing-supplies distributor Noland Co.
James A. Pardo Jr., a partner at King & Spalding, represents Commerzbank AG and Pitney Bowes Credit Corp., two companies that are leasing aircraft to Delta.
The city of Atlanta, which owns Hartsfield-Jackson Atlanta International Airport and has millions of taxpayer dollars at stake, is represented by in-house attorney Linda K. DiSantis as well as Amy Edgy Ferber, an associate at King & Spalding.
One of the biggest potential creditors is the Pension Benefit Guaranty Corp., the federal agency that assumes administration of distressed private pension plans. Funded by U.S. taxpayer money, the PBGC may have to take responsibility for paying pensions if company management is successful in talking its pilots into agreeing to the termination of the pension plan.
In exchange for approval to transfer the pension plan to PBGC, which would pay less retirement benefits than Delta, the pilots would get about $330 million in future considerations.
WILL DELTA BE SOLD?
Depending on their investment strategy, the GE/Morgan Stanley/American Express team has several options available. The group could decide to sell Delta, lock, stock and barrel, to another airline, or they could also accept a buyout offer from an outside investor.
In August 2005, for example, maverick financier Carl C. Icahn bought all of textile-maker WestPoint Stevens Inc., which was operating in Chapter 11, for $703.5 million. Icahn outbid rival financier Wilbur L. Ross, who offered $643 million, for the West Point, Ga.-based company.
It's unlikely that an investor would want to buy all of Delta's assets in one fell swoop, Rochelle said. Instead, certain assets would probably be snapped up more quickly than others.
One of those assets is Delta's operating certificate from the Federal Aviation Administration. Northwest Airlines Corp. recently agreed to pay $2 million for the operating certificate of Independence Air Inc., which recently liquidated.
Northwest bought the operating certificate with plans to run Independence as a separate airline. The process of obtaining an FAA certificate for a new airline would take much longer than buying one from a defunct airline, Rochelle said.
"With that certificate, you can jump through FAA hoops more quickly and get the airline back into operation much more quickly," he said.
WHAT IS DELTA WORTH?
If Delta is liquidated, determining how much the company is worth is far from an exact science.
That's partly because Delta has not yet filed a detailed statement of its assets and liabilities with the U.S. Bankruptcy Court in the Southern District of New York. The company was supposed to have submitted that document soon after it filed for bankruptcy on Sept. 14. But Delta has been granted three extensions.
It's also difficult to place a value on Delta's aircraft because many of the planes are tied up in complex lease arrangements. Some individual planes are owned by multiple lenders and lessors, said Darryl S. Laddin, a partner at Arnall Golden Gregory.
"You seldom see a situation in which one entity owns the whole airplane free and clear," Rochelle said.
Delta has provided a broad sketch of its assets. The company estimates its flight equipment is worth about $11.9 billion and that its ground property and equipment are worth about $1.9 billion, according to a bankruptcy court filing.
If a pilot strike is averted at Delta, the prospects for unsecured creditors are not entirely bleak.
When United Airlines emerged from bankruptcy protection, the company estimated it would only be able to pay its unsecured creditors 4 cents to 8 cents on the dollar in the form of new United stock. Shares of United on Wednesday morning traded at $38.94 per share, amounting to about 20 cents on the dollar.
In the event of a Delta liquidation, there still will be plenty of work for lawyers to do, although not necessarily the law firms currently assigned to the case.
Davis Polk & Wardwell, which is guiding Delta through Chapter 11 reorganization, could be displaced by another firm as lead legal counsel during a liquidation, depending on how Judge Adlai S. Hardin Jr. rules.
"It would be a tremendous struggle," Butler said.
Hardin could decide to convert Delta's bankruptcy from Chapter 11 to Chapter 7, in which case he would appoint a new trustee. That trustee could decide to hire a new law firm to represent him, said Laddin, who has served as a federal bankruptcy trustee.
Delta's current law firms, including Davis Polk & Wardwell and Alston & Bird, would be paid for the work they've done but would lose out on the future work of conducting the liquidation, Laddin said.
Although it's possible that Atlanta could soon face a life without Delta Air Lines, talk of a pilot strike at Delta is probably premature, said Schreeder, Wheeler & Flint's Christy, who represents retired pilots.
"A strike would be a crippling blow from which they could not recover," Christy said. "Both [management and the pilots' union] are smart enough to realize that, and they'll make a typical 11th-hour deal."
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