The likely bankruptcy filing of UAL Corp., parent of battered airline United Airlines, could have serious repercussions in the debt and equity markets, but should not - for once - mean a horrific loss for Wall Street lenders.

The Bush Administration last week rejected UAL's request for a $1.8 billion loan guarantee, which the airline desperately needed, and the company has indicated that without an injection of emergency financing it will likely file for Chapter 11 bankruptcy protection. The company has lost more than $4 billion in recent years, and needs to pay about $1 billion in deferred debt obligations by year's end.

A bankruptcy would not only heap misery on the airline industry, which is already reeling from US Airways' bankruptcy filing earlier this year, but present a host of new problems for bond and equity investors, as well as commercial and investment banks that have extended loans to the airline over the past few years.

Compared with other high-profile corporate burnouts like Enron Corp. and WorldCom Group, lender exposure to the ailing UAL does not seem that substantial, according to Thomson Financial. There have been only five global syndicated loans issued to UAL in the past few years, the most substantial being a $616.2 million loan lead-agented by ABN Amro, and co-agented by Scotiabank and Commerzbank. Commerzbank has been one of the most prolific lenders to UAL-it sole-managed the most recent loan, a $227 million offering in May 2000, as well as another $227 million loan in June 1999.

UAL's European-dominated loan managers are a far different lot than its global debt underwriting crew, which has a more domestic bent. J.P. Morgan Chase, Goldman Sachs and Morgan Stanley have all been lead managers on the airline's relatively frequent offerings of enhanced equipment trust certificates, those hybrid oddities that comprise most of the airline industry's debt market activity. Credit Suisse First Boston and Salomon Smith Barney have also been involved in UAL EETCs.

The lenders who will take the sharpest rap on the chin, should UAL go bankrupt, are other companies affiliated with the airline industry, sources said. These include General Electric Co., Airbus and Boeing Co., all of whom have lent UAL substantial money in recent years, sources said.

One airline industry observer said, however, that some Street banks could ultimately lose some capital on UAL's implosion. "There are a whole bunch of creditors, and on the Street it's the usual suspects," the source said. "I don't think anyone has a truly serious exposure though." He mentioned German bank KFW as having provided at least $500 million in financing to UAL, and said Bank One has been rumored to have a larger-than-usual exposure to the company. KFW could not be reached for comment; Bank One said it could not comment on specific clients.

EETC equation

On the buy side, the investors most greatly, and immediately, affected are UAL shareholders, whose holdings are now almost worthless compared with past evaluations. UAL stock, which traded in the $40-per-share range for most of first-half 2001, was trading at $1.28 per share as of press time.

Holders of UAL EETCs could be in an equally serious pinch. EETCs are backed by jet aircraft and have a third-party financial guaranty as collateral. Yet EETCs have been relatively untested in bankruptcy, and although such bonds have Section 1110 protection-meaning that the company has 60 days to decide whether it will continue to make payments on the notes or return the planes-the situation is dire for many certificate holders.

In the case of bankruptcy, "United would at a minimum readjust and reduce its fleet capacity," said Richard Bittenbender, a vice president and senior credit officer at Moody's Investors Service. "Unlike US Airways, United has not given specific indications what fleet types it is interested in maintaining. Nothing has been stated clearly. United also tends to have a more diverse fleet than US Air has. It is a bit more difficult to anticipate which aircraft they would keep and which they wouldn't."

The core question facing United EETC bondholders: Will a bankruptcy court mandate that United needs to sell off a substantial portion of its fleet, which is literally the collateral backing their deals? Whatever aircraft United does not want to retain gets "kicked" back to bondholders. This is an almost certain loss for bondholders, who will be forced to sell off airplanes at a likely great loss.

For EETC investors, it all depends on the age and make of the aircraft backing their bonds. "If your deal has older, weaker, unattractive collateral, it could be a problem," said Don Powell, a senior director at Fitch Ratings. Market sources estimate that while the average age of United's roughly 550-plane fleet is eight years, it has a batch of 767s whose average age is 19 years old. Those are likely candidates to get dumped.

Bankers said that they doubted the overall structure of EETCs will be altered due to the bankruptcies of US Air and possibly United-after all, investors knew about the risk when they bought the deals. But it will, however, likely make it harder to get buyers interested in upcoming EETC offerings, one banker said.

The more radical changes will likely be in the airline industry, as United's foibles have shined a harsh light on current practices. The airline pricing model and cost structure is broken, said Moody's Bittenbender, as customers no longer believe there is any rational reason for the radical disparity and range of ticket prices.

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