If you own
shares, you might want to sell them while you still can.
That's what Credit Suisse First Boston analyst James Higgins advised Tuesday in a new research note bluntly titled, "Liquidity Concerns Worsen: Sell UAL Shares." Other Wall Street analysts have been issuing similar advice, as the parent of United Airlines, the second-largest carrier, stumbles toward bankruptcy. UAL was down 4% at $3.15 following the CSFB note.
UAL management and labor unions insist that the company can avoid Chapter 11 by cutting costs and securing a $1.8 billion loan guarantee from the government, which is why the stock has nearly doubled since mid-October. But analysts have soured on the company's chances because the company is rapidly running out of cash and time, burning through nearly $8 million a day.
And steep debt payments are coming due because the company can't meet the terms of its restructured loan agreements, forcing it to rely on grace periods while the government decides its fate. On Monday, the company was supposed to make a $375 million payment on enhanced equipment trust certificates, or EETCs, which are the bonds that back airplane leases. As expected, the company took out a 10-business-day grace period to avoid going into default and won't have to make a payment until Dec. 13.
Meanwhile, UAL has run into problems with German bank Kreditanstalt fur Wiederaufbau, even though it had restructured its $500 million debt with the bank last month. The "debt held by a German bank had ostensibly been refinanced until 2007," Higgins said. "As it turns out, that debt became due yesterday." UAL failed to meet all of the conditions of its refinancing with KfW and now has a week to make that payment.
So it now must find a way to pay, or avert paying, nearly $900 million in debts over the next two weeks. And with the company's recent efforts to gain wage concessions from its labor unions
hitting a bump at the worst possible time, the company's chances at government help are fading fast.
Machinists will hold a critical vote on wage concessions this Thursday, which will determine the fate of the company if the proposal is rejected. But even if machinists vote in favor, there is no guarantee that the company will get the government loan it needs or that the money will arrive in time to save the company. Under the renegotiated terms of its loans, the company is obligated to keep $1 billion in free cash on hand at the end of each month.
UAL's fate will likely be decided sometime before 2003 arrives, giving investors little chance to get rid of their shares in the event of a bankruptcy, which could come at any time. (Bankruptcy would also destroy any investor equity in the company; see
related story from Nov. 20.)
Higgins, and most of Wall Street, now feel bankruptcy is virtually inevitable. "This latest development nearly seals UAL's need to file for bankruptcy protection, and we continue recommend selling the shares," wrote Higgins.