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S&P: Northwest Faces a Credit Drop

By Philip Baggaley, CFA When will Northwest Airlines (NWAC) pull the Chapter 11 trigger? The carrier disclosed on late Sept. 13 that it had missed $23 million of payments due on aircraft-backed debt and that it hadn't made a $19 million payment due regional airline partner Mesaba Aviation. Further, Northwest noted that a $65 million pension payment is due Sept. 15, and failure to make it would trigger a lien against the airline's assets unless it first files for bankruptcy.

On Sept. 14, Standard & Poor's Ratings Services said that its ratings on Northwest Airlines (CCC-/Watch Neg/C) debt remain on CreditWatch with negative implications. The Sept. 13 disclosures indicate that Northwest will very likely file for Chapter 11 shortly, probably on Sept. 14.

SURGING FUEL PRICES. S&P's ratings on Northwest and its Northwest Airlines Inc. unit were lowered to CCC- on Sept. 6. The corporate credit ratings of both entities will be lowered to D upon a bankruptcy filing, as will ratings on unsecured debt, the bank credit facility, and airport revenue bonds. Ratings on enhanced equipment trust certificates will be reviewed for possible further downgrades.

Northwest's previous strategy of seeking to negotiate concessionary labor contracts with its unions and obtaining relief from pension-funding obligations through new federal legislation appears to have been overtaken by the surge in fuel prices. Unrestricted cash, $2.14 billion as of June 30, had fallen to $1.7 billion by Aug. 31, and Northwest recently predicted a third-quarter net loss of $350 million to $400 million, due mostly to much higher fuel costs.

Northwest should be able to reorganize successfully, though it will likely shrink its fleet and its domestic operations, as bankrupt United Air Lines has done. It would also be expected to negotiate or, if necessary, ask the bankruptcy court to impose, concessionary labor contracts and to eventually seek to terminate its defined-benefit pension plans.

Baggaley is a credit analyst followingthe airline industry for Standard & Poor's Ratings Services

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