Investors Worry About Bond Status

Investors holding $413 million in special lease revenue bonds at Los Angeles and San Francisco airports are worried that Monday’s bankruptcy filing by United Airlines’ parent company may leave them stuck with worthless paper.

UAL Corp. has used a little-known public agency as a conduit to issue four tax-free bond offerings to fund the building of passenger and cargo facilities at California’s two largest airports.

Although the bonds have municipal status, no government or public agency has guaranteed the bonds or is liable for any default.

Investors say that the wording on the “indentures,” or 750 pages of rules that govern the bonds, might be vague enough to allow the nation’s second-largest airline to avoid making payments.

“We are uncertain whether they will be paid out of the bankruptcy,” said Bud Byrnes, chief executive of RH Investments in Encino and the holder of $200,000 worth of the bonds at face value.

Now that the company has filed for bankruptcy protection, Byrnes added, he fears that the bonds may “become about as worthless as the company’s stock.” On Monday, UAL shares closed unchanged at 93 cents on the New York Stock Exchange. The bonds now trade at 20 cents to 25 cents on the dollar.

Although the bonds first were issued to institutional investors, most changed hands as United’s financial situation deteriorated and now are held by individuals who purchased them at steep discounts.

Details of UAL’s strategy for operating under Bankruptcy Court protection have yet to emerge, but the company has obtained $1.5 billion in fresh financing from a consortium of banks to continue operating as usual for now. The Elk Grove Township, Ill.-based carrier is expected to cut jobs and trim unprofitable flights as the company reorganizes under Chapter 11.

Failure to win a $1.8-billion federal loan guarantee last week pushed the money-losing airline into Bankruptcy Court.

California represents a sizable portion of United’s business. The airline is the No. 1 carrier at Los Angeles International Airport and San Francisco International Airport.

UAL used two bond offerings, totaling $225 million, to construct at LAX a giant cargo terminal, upgrade passenger terminals 7 and 8 and build an underground customs and immigration center for international flights, according to Alan Wayne, an airline spokesman.

Two San Francisco bond offerings -- totaling $188 million -- helped fund construction of an international terminal, he said.

All four offerings were made over the last five years through the California Statewide Communities Development Authority, an agency that confers tax-exempt status on the investments.

Governments often sponsor bond issues by private companies if the bonds are used to fund improvements for public infrastructure projects such as airports. This type of financing gives a tax break to investors and lowers the cost of borrowing for the company.

United has not said whether it would give up gates and space at either airport, but officials from LAX and SFO confirm that other airlines are interested in any surplus United facilities. If other airlines were to take over some of United’s areas, they would have to pay the airport for the ground leases and certain improvements. But whether they’d have to pay the bondholders is far less clear.

Bankruptcy and municipal bond experts, in fact, are divided over what will happen to these United investments now that UAL is operating under Bankruptcy Court protection.

Jon Thomas, a partner with Saybrook Capital, an investment bank that specializes in advising creditors in bankruptcy reorganizations, said he would be surprised if another airline could move into any of the United space linked to the bond issues without taking over the payments.

Zane Mann, publisher of California Municipal Bond Advisor, also believes that the bondholders are likely to be made whole at the end of the day. If United stops payment, he believes, trustees for the bondholders -- in this case Wells Fargo & Co. and Bank of New York, depending on the issue -- will attempt to break United’s leases and find a new tenant for the airline’s facilities. In turn, he expects the new tenants to make the payments on the bonds.

“If you look at the history of airline bankruptcies,” Mann said, “the demand for airport gates has been good enough so that if an airline defaults on the lease payments there are other carriers standing in line to get those gates.”

Yet Karen Sisson, chief financial officer of Los Angeles World Airports, which represents LAX and Ontario International Airport, has a different take on the situation. “I believe there is no obligation for a new tenant to pay the bondholders,” she said.

Byrnes also was pessimistic, noting that “there doesn’t seem to be a provision in the documents for the transfer of gates and facilities,” apparently leaving the bondholders with no mechanism to be paid.

All that the bond documents do clearly say, according to Byrnes and others, is that the holders become general creditors in the event of a bankruptcy filing, a status that places them with other unsecured creditors owed more than $3 billion by UAL. In other words, they’ve been sent to the back of the line.

“These are the type of bonds most at risk in the United bankruptcy,” said Daniel Champeau, managing director of Fitch Ratings, a corporate credit rating firm.

The major unsecured creditors, including bondholder representatives, are expected to meet in Chicago on Friday to establish a committee to represent their interests during UAL’s reorganization.

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United’s gates

Here is a look at the number and percentage of gates United Airlines operates at various California airports:

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Airport: San Francisco (SFO)++

Number of gates: 90

United’s gates: 25

% of total United uses: 28%

United’s rank+: 1

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Airport: Los Angeles (LAX)

Number of gates: 157

United’s gates: 27

% of total United uses: 17

United’s rank+: 1

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Airport: Oakland (OAK)

Number of gates: 24

United’s gates: 3

% of total United uses: 13

United’s rank+: 2

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Airport: Ontario (ONT)

Number of gates: 26

United’s gates: 3

% of total United uses: 12

United’s rank+: 2

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Airport: San Diego (SAN)

Number of gates: 41

United’s gates: 5

% of total United uses: 12

United’s rank+: 2

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Airport: San Jose (SJC)

Number of gates: 31

United’s gates: 3

% of total United uses: 10

United’s rank+: 3

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+ Rank based on United Airlines passenger traffic for 2001.

++ Some gates at San Francisco International Airport are under construction. The number of United gates at SFO does not include gates used by international flights.

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Source: United, Transportation Department, the airports

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Research by Times librarian John Jackson