With US Airways seemingly on the brink of its second bankruptcy in as many years, the fate of its enhanced equipment trust certificates (EETC) are once again being called into question.

The company, which emerged from its first bankruptcy in April 2003, had been seeking $800 million in annual concessions from all of its unionized workers. Its efforts were thwarted last week by a group of pilots in the union's leadership council that blocked the proposal from being voted on. The company is facing a $110 million pension contribution on September 15, and could opt to file for bankruptcy before the deadline.

While the news is not positive for EETC holders, the impending bankruptcy does not necessarily signal imminent default of the bonds, said Moody's Investors Service Senior Vice President Richard Bittenbender. "EETC bonds have a liquidity facility associated with them; even though the airline stops paying interest and principal, the trust has access to these revolving lines of credit."

Using the company's last brush with the bankruptcy court as a gauge, the payment stream will likely be renegotiated, but the liquidity facility will remain intact. The airline did return some its aircrafts the last time around, and the trust was left having to find buyers and use the proceeds to pay bondholders. Some EETC investors experienced losses due to the declining resale value of the aircrafts in the last US Airways bankruptcy, Bittenbender said.

The question today is whether US Airways would file for Chapter 11, or whether the airline would instead liquidate under Chapter 7."If US Airways chooses reorganization, there is a question as to whether they will use any, or all, of the aircrafts. If they liquidate, they will simply hand all of the aircraft back," Bittenbender said.

It is unclear which scenario would work out better for EETC bondholders. In the event of reorganization, US Airways could decide to use all of the aircrafts in a given transaction. However, the price per aircraft could come down. For example, US Airways could make an offer of $75 a month for an aircraft that had previously brought in $100 a month. "At this point, the debt holder has to decide whether to take the $75, or take their airplane back. That's the game of chicken that was being played last time around," Bittenbender said.

Should the airline liquidate, the trust would be responsible for leasing or selling off an entire fleet of aircraft of dubious resale value. However, it would be a cleaner process. "With a [liquidation], you know you have some airplanes that you have to do something with," Bittenbender said. "Otherwise, you might get dragged into a long, protracted negotiation, as was seen in the first US Airways bankruptcy. The uncertainty factor is unnerving."

The rating agency has no immediate plans to take rating actions on any of these transactions, Bittenbender said. However, future downgrades are a distinct possibility, he added.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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