United must post profit in 3 months...
To avoid liquidation by its debtors-in-possession, United must turn a profit for the first quarter of 03. It's not gonna happen. This is from the 16 Dec AvWeek:
United's DIP Loans
Require Profit in 2003
DAVID BOND/WASHINGTON
The $1.5-billion debtor-in-possession financing agreements intended to get United Airlines through 18 months of Chapter 11 bankruptcy protection set high hurdles for--and impose a brisk pace on--the airline's restructuring attempts.
Bank One, providing an initial term loan of $300 million, and JPMorgan Chase, Citicorp USA, CIT Group/Business Credit and Bank One, sharing equally in a $400-million loan and an $800-million revolving credit facility, have imposed covenants that require United to operate profitably within three months. The carrier must maintain in-the-black operations through the rest of 2003 and end the year with $575 million in before-tax earnings (see tables).
Other covenants limit capital spending to $110 million per quarter during the first half of 2003, $116 million in the third quarter, $142 million in the fourth quarter, and $100 million per quarter in the first half of 2004; and require the carrier to keep at least $200 million in cash and cash equivalents at all times. And United must try again to secure a federal loan guarantee, this time for its Chapter 11 exit financing.
FAILURE TO LIVE UP to these and two dozen other covenants could trigger default on the financing. This in turn would allow the lenders to foreclose on United's collateral for the debt, which comprises much of its unencumbered aircraft and other assets. As described by United in its bankruptcy filing, foreclosure would "spell the end."
Moreover, access to financing is limited initially to $800 million--the $300-million Bank One loan, the $400-million four-party loan and $100 million of the revolver. For access to the remaining $700 million, United must achieve positive cumulative earnings, scheduled next October, and develop plans for $300 million in additional cost reductions. Lack of access to the $700 million would prevent United from meeting financial targets, again leading to default.
United began debtor-in-possession (DIP) financing talks late in September, even as it pursued Air Transportation Stabilization Board (ATSB) approval of a $1.8-billion loan guarantee, because it knew it would have to declare bankruptcy if the ATSB turned it down. It negotiated eventually with the four lenders and with GE Capital, which at one point submitted a draft proposal for $2 billion in bankruptcy financing, but on less favorable terms.
Todd Snyder, a managing director of UAL financial consultant Rothschild Inc., said in an affidavit that the lenders questioned the revenue projections in United's business plan throughout the negotiations. "Similar to the ATSB, the DIP lenders considered United's internal financial projections to be far too rosy," Snyder told the court. This led to a "club" facility in which each lender limited its risk by taking only a quarter of the $1.2 billion. Bank One's extra $300 million reflects its affiliation with First USA Bank, which co-brands United's frequent-flier credit card. First USA buys miles and distributes them to cardmembers' accounts for credit card purchases, a "significant source of revenue to United." Because of this relationship, Bank One was willing to provide the larger loan.
This double-DIP approach depended on approval of both facilities, Snyder said. Bank One wouldn't have made the initial loan without the second facility's back-end financing, because Bank One knew United would need much more money later on. And the three additional lenders "refused to provide a significant back-end loan without Bank One's substantial initial loan."
In the end, United adjusted its business plan for the DIP lenders in ways it wouldn't for the ATSB. "Like the ATSB, the DIP lenders did not believe that the business plan [presented to the ATSB] had a reasonable chance of succeeding," United told the court. "According to the DIP lenders, regardless of the size of the DIP loan, [United's] cost structure precluded [it] from achieving profitability. [United] then went back to the DIP lenders with a revised business plan that contained significant cost reductions." This plan will require concessions early in bankruptcy from labor and other stakeholders that go well beyond what failed two weeks ago to satisfy the ATSB.
For United to avoid breaching the DIP covenants it will need cost savings "virtually immediately," the carrier told the court. The bankruptcy process will have to deal with its labor contracts, preferably through agreements with its unions but through the court itself, if necessary "as a decidedly last choice."
United's Marching Orders
To avoid losing its $1.5 billion in debtor-in-possession financing, United Airlines must keep its cumulative losses, dating from Dec. 1, 2002, within these totals:
$964 million on Feb. 28, 2003
$881 million on Mar. 31, 2003
$849 million on Apr. 30, 2003
$738 million on May 31, 2003
$585 million on June 30, 2003
$448 million on July 31, 2003
$219 million on Aug. 31, 2003
$98 million on Sept. 30, 2003
It must make cumulative profits, dating from Dec. 1, 2002, of at least
$46 million by Oct. 31, 2003
$112 million by Nov. 30, 2003
And it must make cumulative profits of at least
$575 million during the 12 months ending Dec. 31, 2003
$901 million during the 12 months ending Jan. 31, 2004
$1.084 billion during the 12 months ending Feb. 28, 2004
$1.196 billion during the 12 months ending Mar. 31, 2004
$1.297 billion during the 12 months ending Apr. 30, 2004
$1.383 billion during the 12 months ending May 31, 2004
All amounts are earnings before income taxes, depreciation, amortization and rents.
Source: UAL bankruptcy court filings