Airport Bonds May Face Head Wind on UAL Ruling

A court ruling allowing United Airlines’ parent to stop making payments on bonds issued to build new facilities at airports in Los Angeles and two other cities could crimp the future market for such bonds, but it shouldn’t seriously damage the ability of U.S. airports to finance general building projects, analysts said Wednesday.

U.S. Bankruptcy Judge Eugene Wedoff in Chicago, who is overseeing UAL Corp.’s reorganization under Chapter 11 of the U.S. Bankruptcy Code, granted UAL’s request to stop making payments on $248 million of “special facilities revenue bonds.”

The debt was issued to fund specific UAL projects at Los Angeles International Airport -- where United is the busiest carrier -- and at airports in San Francisco and New York. The LAX portion accounted for $59 million of the bonds in question.

Overall, UAL has about $1.7 billion of such bonds outstanding, including more than $200 million related to projects at LAX that include a cargo terminal and upgrades to United’s passenger terminals.

But the judge’s ruling Tuesday only applied to bonds whose classification was being disputed by United and holders of the debt, said Jean Medina, a spokeswoman at UAL’s headquarters in Elk Grove Township, Ill.

Wedoff sided with UAL and ruled that the debt could be classified as an unsecured obligation, which meant UAL didn’t have to make payments on the bonds while it was in bankruptcy proceedings. Conversely, a secured debt is backed by the debtor’s assets and holders of such debt have a higher priority in the reorganization process than unsecured holders.

Thus, the ruling heightened the possibility that holders of the disputed bonds would ultimately recoup only a small portion of their investment when UAL emerges from bankruptcy protection, which is expected this year.

At least some of the bondholders are likely to appeal the ruling, analysts said. The decision also “sets a troubling precedent” that could make such bonds less attractive to future investors, who in turn might demand higher interest rates for the added risk, credit-rating firm Fitch Ratings in Chicago said Wednesday.

That could limit the airlines’ ability to construct special projects at airports and, perhaps, place a greater burden on the airports to finance and build improvements, analysts said.

But Fitch analyst Peter Stettler said that the UAL case was atypical because it was a bankruptcy situation and that it shouldn’t seriously hinder the ability of airports to keep issuing bonds for new construction.

“It will have a minimal impact on the market for airports’ general-revenue bonds,” he said.

Medina said the company was pleased with the ruling. The decision “will help United reorganize more effectively” and is in “the best interests of all our stakeholders,” she said.

Although the bonds have municipal status, no government or public agency has guaranteed the bonds or is liable for any default. Also, government officials of Los Angeles, which runs LAX, have said they can’t step in and demand that UAL make payments to all its bondholders.