UAL's debt issue highlight need for cash

United Airlines' $175 million in debt issued last week is its most expensive in at least nine years, reflecting the carrier's need for cash and a dwindling supply of assets to use as collateral.

United's sale of senior secured notes yielding 17 percent comes as U.S. carriers seek financing after high-fare business travel collapsed and jet-fuel prices jumped 58 percent in the past four months. Airlines have tried to build cash for the U.S. fall, when demand begins to wane.

"It's high," William Warlick, senior director of Fitch Ratings in Chicago said of the rate. "Paying 17 percent for debt is not where you want to be."

United is paying at least 6 percentage points more than its peers in recent transactions. Last week's issuance was Chicago- based United's most expensive debt since at least July 2000 when it sold $186.4 million at 8.03 percent, Bloomberg data show.

The 17 percent yield United has to pay "is not a vote of confidence in their future," said Philip Baggaley, a credit analyst at Standard & Poor's in New York, which assigned a "B+" rating to the offering. "They were certainly hoping to do better than this in terms of what they ended up paying. They're raising cash where they can."

United's $175 million of three-year, 12.75 percent debt priced at 90.07 cents on the dollar, according to data compiled by Bloomberg.

'Desperation' Issuance

This type of issuance shows "desperation," Roger King, an analyst with CreditSights Inc., wrote yesterday in a note.

The debt issue "will further boost our liquidity as we continue to take the right actions in response to the difficult environment, adjusting capacity and reducing our cost structure," said Jean Medina, a spokeswoman for United. "The transaction was oversubscribed with terms that reflect the structure, the nature of the collateral used and the tight credit market."

The difference in United's borrowing cost over recent debt offerings by AMR Corp.'s American Airlines and Continental Airlines Inc. 'is striking," said Douglas Runte, managing director at Piper Jaffray & Co. in New York.

"A tight credit market alone does not explain these different borrowing costs," he said. "Investors clearly have a significantly higher degree of concern with United than either Continental or American."

Engine Parts

UAL is expected to have a second-quarter loss of $2.59 a share, the average of seven analyst estimates in a Bloomberg survey, which would be its seventh straight deficit. UAL fell 31 cents, or 8.9 percent, to $3.16 at 10:46 a.m. in Nasdaq Stock Market composite trading in New York. The shares dropped 38 percent in the 12 months ended yesterday.

Part of the reason for United's higher borrowing costs is the lower quality of assets it offered as collateral, according to Warlick and King. "Ultimately, they are running out of unencumbered assets," Warlick said of United.

The debt is backed by spare aircraft and engine parts inventory for jets including Airbus 320s and Boeing Co. 777s. The parts have an appraised value of $583 million, according to a U.S. regulatory filing.

Those parts would have a "very high" recovery rate in the event of a default, even though some of the parts aren't new, said S&P's Baggaley.

AMR Sale

United, which emerged from bankruptcy on Feb. 1, 2006, said June 17 it expects to have $2.5 billion in unrestricted cash at the end of the second quarter. The carrier has about $1 billion in unencumbered assets, not including the spare parts inventory.

AMR sold $520.1 million in debt yesterday that priced to yield 10.375 percent. It was backed by four Boeing Co. 777- 200ERs and 16 new 737-800s the carrier plans to buy in the next year, the company said.

Continental is paying 9 percent yield on $389.7 million of debt it sold on June 16, backed by 19 aircraft already in its fleet or new planes to be delivered before October. US Airways Group Inc. sold shares and debt in May, while JetBlue Airways Group Inc. sold stock earlier this month.

"The credit markets stink and these guys need to raise cash," Hunter Keay, a Stifel Nicolaus & Co. analyst, said yesterday of United. "Unfortunately there's a lot of uncertainty in the credit markets and uncertainty in the airline industry over what's going to happen over the next year."