Continental Details Reorganization
Continental Airlines said Thursday that it plans to pay its creditors about $121 million in cash as soon as it emerges from bankruptcy, which the carrier predicts will occur by the middle of next year.
Continental, which sought protection from its creditors under federal bankruptcy laws on Sept. 24, 1983, said its total debt, exclusive of what it owes its labor unions, totals $897.1 million.
At a news conference held in the same hotel meeting room in which it announced its bankruptcy filing two years ago, the airline’s chairman, Francisco Lorenzo, unveiled the company’s final reorganization plan. He said 92% of the creditors have agreed to the airline’s settlement offers.
Lorenzo, in an interview preceding the news conference, also said that he was not disappointed that his recent attempt to take over Trans World Airlines failed.
“We knew from Day One that it was a speculative deal,” he said. “We knew the odds of it being completed were not very high.” He estimated that Continental’s parent company, Texas Air, earned $40 million in profits from its efforts to merge with TWA.
At the Continental news conference, Lorenzo said it was “incredible” for a bankrupt company to pay its creditors at 100 cents on the dollar without issuing new equity in exchange for debt. Holders of Continental’s stock, which is traded on the American Stock Exchange, will not see their equity diluted, he said.
Before Continental officially emerges from its bankruptcy protection, the court will hold disclosure hearings on the reorganization plan. Approval is required of two-thirds of the creditors in dollar terms. Additionally, half of the members in each of 35 creditor groups must also approve. If an insufficient number agrees, the bankruptcy judge may impose a settlement.
Continental’s unions, for example, claim that they are owed between $3.5 billion and $4 billion, a claim that management calls ‘absurd.’
Of all of the creditors of the airline, those owed $527.3 million, or 59%, actually agreed to the Continental plan of reorganization filed in the Houston bankruptcy court on Thursday. Another $296.1 million, or 33% of the total, consists of public debt, such as notes and debentures, whose payments will simply be reinstated (with accrued interest and dividends brought up to date) and whose owners are automatically considered in agreement.
All during the time that Continental has been in bankruptcy, it has continued to pay both interest and principal on loans that were secured by collateral, such as airplanes and spare parts, so as to avoid having such collateral confiscated. Such loans totaled 40% of the total debt. Continental is still in negotiation with creditors owed $73.7 million, or 8% of the total debt, the airline said.
The airline said it had proposed to the court that it pay $35 million in what it said were “legitimate” claims by employees for back pay, vacation pay and medical benefits that had not been paid when the airline filed for Chapter 11. Another $35 million is to be paid into pension funds.
Continental said that among those with whom it had not not yet reached agreement were a group of 23 insurance companies, including Aetna, Travelers, Connecticut General and State Farm Insurance, to which it owed $37 million. It had, however, gotten agreement from several lending consortiums, which are owed a total of $300 million.
Philip J. Bakes Jr., Continental’s president, said at the news conference that these same banks have agreed to give Continental a revolving credit line of $50 million so that the airline can buy new equipment once it emerges from Chapter 11.
As previously reported, under the reorganization plan, Continental’s major secured creditors will be paid all they are owed over an eight- to 10-year period. They will receive the total face amount of the debt and interest of 1 percentage point above the prime rate.
The unsecured creditors, such as vendors who sold oil or food to Continental, will receive 30% of what they are owed on confirmation of the plan, with the remainder coming within five years. They will be paid interest of 2 percentage points above prime.
In its reorganization plan, the airline also made certain assumptions about its passenger capacity growth and its revenue and profits in order to assure the court that it could pay its debts on schedule. But Mickey Foret, vice president-finance and chief financial officer, cautioned that elements of its financial plan did not constitute predictions.
Total revenue, he said, would rise to $3.75 billion by 1990, compared to $1.8 billion by the end of 1985.
The carrier based its figures on the assumption of a recession begining next year and said that would result in a decline of load factors--the average percentage of seats filled--to 56.6% next year, down from an average of 64% this year.
‘Screaming for Help’
In the plan, the airline also “assumed” net income of $67 million next year, $97 million in 1987, $106 million in 1988, $161 million in 1989 and $133 million in 1990.
In the interview concerning TWA, Lorenzo said that, when TWA came “screaming for help” because New York financier Carl C. Icahn had announced a takeover bid, Texas Air was interested in TWA’s computerized reservation system, its international routes, its marketing strength and its marketing franchises. Even had Texas Air won the takeover battle, he said, he would not have sold off these assets or merged TWA with Continental.
It was a highly profitable deal even though it fell through, he added.
After a long battle, Icahn won control by acquiring more than 50% of TWA.
Texas Air had an option on 6.5 million shares of TWA common. The option allows the sale of the stock to TWA at a price between $19.50 and the $24 that Icahn offered to shareholders for the stock. That gives Lorenzo a profit of $24.5 million. Texas Air, he said, owns another 2 million shares outright and will also get a fee of $18 million for the termination of its June agreement to merge with TWA. After expenses involved with the transaction, the profit will be $40 million, he said.
Lorenzo said he would not rule out a future acquisition.
“If there is a deal that makes sense to us strategically, we’ll do it. But we’ll probably not do anything big because we have enough on our plate. We’d rather build from within than buy somebody else’s problems.”
