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Credit Lines Open to Airlines; Lenders Have Many Reasons to Cut Deals Despite Industry Woes

Posted on: Wednesday, 21 September 2005, 06:00 CDT

A cardinal rule of business is that if you can't pay your bills, it's going to be tough to borrow money to keep operating.

Unless that business is an airline. Carriers can lose billions of dollars, seek bankruptcy protection and still have lenders lining up to provide financing.

"They do it because they can make a lot of money," said airline consultant Alan Sbarra. "They're able to cut deals that move them to the front of the line when it's time to be paid."

Northwest Airlines and Delta Air Lines filed for bankruptcy last week, joining United Airlines and US Airways in the ranks of large carriers operating under court protection.

Before filing, Delta had lined up $1.7 billion in financing from General Electric Co.'s commercial finance division and Morgan Stanley. Such deals are called debtor-in-possession financing, and such lenders are typically given preference above others owed money by the company in bankruptcy.

Northwest has not lined up any such loans, saying it has about $1.5 billion in cash and investments to continue operating. But if Northwest ultimately needs financing, it likely won't have trouble attracting it, analysts said.

Companies like to work with airlines because of their high profiles, and there is an opportunity for a huge return, according to those familiar with such deals.

"The reality is the lenders usually come out OK," said Samuel Engel, a vice president with aviation consultant Simat Helliesen & Eichner in Boston. "Because airlines are vast cash-flow machines, the liquidity is there. It's just a matter of who comes out on the short end of the stick if the deal falls apart."

In addition to banks such as JPMorgan Chase & Co. and Citigroup Inc., another major lender to airlines is GE's capital financing division. It was among those that lent money to US Airways, and it has offered exit financing to United.

While GE's loans are needed by the airlines that borrow the money, keeping those carriers operating is also in GE's long-term self-interest.

Another arm of the company builds aircraft engines and leases planes and engines to airlines. It would take a hit if a large carrier went out of business and its inventory of aircraft was suddenly available, driving down the price of a lease.

"They want to minimize the impact of aircraft being taken out of the market," said James Harris, president of Seneca Financial Group, a Connecticut-based restructuring firm.

Those providing debtor-in-possession loans typically have ensured they will not be on the bad end of any deals. While employees might lose their pensions and vendors ultimately could be paid pennies on every dollar they are owed, the lenders usually get the full amount owed them.

"The theory behind a [debtor-in-possession] loan is that it is first among equals in the bankruptcy process," Harris said.

It's a way of ensuring that distressed companies can attract the cash they need to work through their problems and emerge as healthy enterprises.

They also are able to dictate terms, including high interest rates and strict repayment schedules, because there are few lenders that can provide the levels of cash airlines need, Harris said.

"You could probably find a lot of lenders who would lend them $50 million, $100 million," he said. "But these guys need billions, not hundreds of millions. That limits, with the concentration in this country on the banking side, the number of lenders you can go to."

Source: Richmond Times - Dispatch

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