(Editor's Note: This recovery report, originally published March 12, 2007, has been updated to reflect revised collateral advance rates as a result of further document review.)
On March 12, 2007, Standard & Poor's Ratings Services assigned its bank loan and recovery ratings to
US Airways Group Inc.'s proposed $1.6 billion bank financing. The $1.6 billion senior secured seven-year amortizing term loan is rated 'B' (one notch higher than the 'B-' corporate credit rating on US Airways Group Inc.) with a recovery rating of '1', indicating the expectation for full recovery of principal in the event of a payment default. Net proceeds from the term loan primarily will be used to repay the borrower's existing debt. (For the latest corporate credit rating rationale on
US Airways Group Inc., please see Standard & Poor's research report published March 12, 2007.)
Table 1
US Airways Group Inc.--Credit Profile
Corporate credit rating
B-/Positive/--
Facility/Issue
Issue rating
Recovery rating
Expected recovery
Term (years)/Maturity
Repayment
$1.6 billion senior secured term loan
B+
1
100%
2014
1% per year beginning 2008; final bullet
Recovery Analysis
Simulated default scenario
Standard & Poor's simulated path to default assumes that the borrower is forced to file for bankruptcy a third time (though the first two filings were under different ownership) due to:
Very adverse industry conditions, which could include a fuel price spike combined with a recession (making it difficult to recover added fuel expense by raising fares), or
Outside shocks to the aviation industry, such as a major terror attack or a global outbreak of epidemic disease.
In such a scenario, EBITDAR (EBITDA plus rental expense) could fall below the approximately $1.1 billion required to finance annual interest expense, amortization, and aircraft rental expense.
Our simulated default scenario contemplates the probability that the borrower would reorganize, not so much because the borrower provides a service otherwise unavailable to the economy, but rather because the borrower's reorganization most likely would serve the interests of institutions that rely on cash flow from aircraft leasing and equipment rentals. However, if US Airways were to file a third time then even these aircraft and equipment leasing firms may struggle to support the borrower's fourth reincarnation.
Therefore, while we are contemplating reorganization, we are also mindful that the borrower's potential liquidation is definitely within the realm of possibility in the event of a third bankruptcy. Given the possibility of liquidation and the transaction structure, our recovery analysis is based on a valuation of the discrete assets provided as collateral, and is not reflective of potential recovery derived through enterprise value analysis.
Table 2
Simulated Default*/Valuation-- US Airways Group Inc.
(Mil. $)
--Valuation--
--Results--
Cash collateral ($)¹
$375
Unadjusted value
$1,699
A/R² (%)
85%
Priority claims
$-
Spare parts (%)
50%
IRC §956 limitation
$-
Spare engines (%)
70%
Adjusted value
1,699
Flight simulators (%)
33%
Default bank debt
$1,600
Slots³ (%)
75%-100%
Real estate (%)
80%
Estimated principal recovery
100%
Routes (%)
50%
Ground equipment (%)
50%
Years to default
4 (2010)
*Our recovery analysis is based on a discrete asset valuation; therefore, the simulated default scenario is not applicable to valuation. ¹$375 million is assumed to contribute to lender’s collateral value. ²Eligible receivables—net of offset. ³Slots at DCA are valued at 100%, LGA are valued at 75%.
Valuation
Standard & Poor's applied the advance rates indicated in Table 2 to the asset classes indicated. Two collateral accounts require additional discussion:
Cash
We frequently exclude cash from our collateral valuation analysis. However, in this transaction we gave credit to half of the $750 million of cash collateral in our recovery analysis. The deposit and securities accounts in which the cash collateral will be held are subject to what are called "shifting control" agreements under which the deposit banks will follow US Airways' instructions prior to the airline's default, but agree to follow the instructions of the administrative agent, and not the airline, after receipt of a default notice.
Additional cash collateral provided to cure a violation of the collateral coverage covenant, however, would be deposited into a segregated, "full control" account subject at all times only to the instructions of the administrative agent. This value of this account is in addition to the amount in the cash collateral accounts.
Cash value contributes approximately 22% to our overall collateral valuation of this transaction.
There remain the usual concerns regarding cash as collateral. To the extent that the $750 million of restricted cash comprises a substantial portion of the borrower's available resources in bankruptcy, it would not be unusual for the bankruptcy court to allow the debtor in possession full access to these cash accounts despite the pre-petition cash dominion provisions. Given this situation and based on US Airways' previous bankruptcy process, the bankruptcy court would likely award the lenders:
Current interest, because they were most likely fully secured;
Adequate protection in the form of replacement liens.
While the replacement liens and super-priority claim status for value diminution certainly eases lenders' pain, these benefits are not the same as access to cash collateral in the event of default.
We will monitor the borrower's cash position relative to its overall credit condition. To the extent that the unrestricted minimum cash covenant comes under pressure we may decrease the value of cash contributed to collateral value.
Slots
The administrative agent commissioned Simat, Helliesen & Eichner Inc. (SH&E) to appraise the borrower's slots at New York LaGuardia International Airport and Ronald Reagan Washington National Airport. Slot controls were eliminated at LaGuardia on Jan. 1, 2007, although slot control will remain in place at Ronald Reagan. However, the Federal Aviation Administration is considering various changes to the current regulations at LaGuardia, some of which could reduce the value of slots as collateral. In our analysis we assigned a 100% recovery value to slots at Ronald Reagan and a 75% recovery to the slots at LaGuardia.
Results
The discrete asset valuation assumptions yield a collateral value of approximately $1.7 billion. Therefore, under the simulated default scenario, there is adequate collateral value to fully cover the senior secured term loan, which then equates to a recovery rating of '1' and a bank loan rating of 'B' (one notch higher than the corporate credit rating). Furthermore, the borrower's encumbrance of nearly all other assets increases the likelihood that a bankruptcy court might allow the debtor in possession to have access to the cash collateral accounts despite the cash dominion provisions. Such an action could reduce lender recovery.
Transaction Summary
Table 3
Transaction Summary
Borrower(s)
US Airways Group Inc.
Guarantor(s)
Direct and indirect wholly owned subsidiaries of the borrower
Structure
The structure is augmented by a springing cash dominion provision that is triggered when the borrower's available cash deteriorates below $750 million (this trigger point declines with the outstanding balance of the term loan). The administrative agent monitors the borrower's cash accounts weekly.
Security package
A perfected first-priority security interest in the borrower's cash, accounts receivable, ground service equipment, spare engines, spare parts, flight simulators, real estate, gates, and slots at New York's LaGuardia International Airport and Ronald Reagan Washington National Airport. The collateral package does not include any aircraft and does not include property hereafter acquired.
Legal jurisdictions/issues
State of New York
Key financial covenants
Minimum collateral coverage ratio of 1.25x. Minimum unrestricted cash of $1,250 million.
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