Northwest Airlines announced that it had successfully exchanged $59.06 million of its outstanding debt due through 2006 for newly issued Class D EETC notes due April 2009. Northwest expects to have closed $64.4 million of series 2003-1 EETC as of last Friday. Under terms of the exchange, the single-B rated EETCs will pay a 10.5% coupon. Led by Morgan Stanley, Northwest initially hoped to exchange up to $551.8 million of its unsecured obligations.

As expected, the majority of the interest was for the 8.875% notes due March 2006, with $29.9 million of tenders coming from this investor bucket. An additional $12.3 million of tenders came from holders of 8.375% notes due March 2004, $5.1 million from holders of 8.52% notes due April 2004 and $11.7 million from 7.625% notes due March 2005.

Despite the lofty goals of Northwest to tranche out a half-billion of its distressed debt, most were not expected to participate in the exchange, as analysts believed Northwest was liquid enough to make near-term payments. To entice holders of near-term maturities to exchange, Northwest offered a premium for bonds maturing over the next two years.

Holders of bonds due in March and April 2004 were each offered a 20% premium, while a 15% premium was offered for holders of debt due in 2005. Holders of the longest-dated debt, due in 2006, were offered just the additional 1.625% in interest.

One unsecured-debt research firm, KDP Investment Advisors, noted the EETC's undesirable location in the capital structure as a disincentive for unsecured holders to buy in - especially holders of 2004 debt. KDP notes the current down cycle for aircraft valuations and the transaction's speculative-grade rating, plus "the deep subordination to the existing senior-debt tranches encumbering the aircraft" as hindrances to the transaction.

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