Business Context and Reporting Period
Company: Delta Air Lines, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: November 30, 2004
Event: Entry into material definitive agreements and creation of direct financial obligations totaling up to $1.13 billion to secure financing and liquidity.
Key Financial Metrics and Obligations
The filing details three new financing agreements entered into on November 30, 2004, with funding commencing December 1, 2004.
- Total Financing Capacity: Up to $1.13 billion.
- GE Commercial Finance Facility:
- Term Loan: $330 million (borrowed in full on Dec 1, 2004). Interest: LIBOR + 6.00% (floor 3%). Repayment: 12 monthly installments starting Jan 1, 2007.
- Revolver: $300 million committed (subject to $50M reserves). $250 million borrowed on Dec 1, 2004. Interest: LIBOR + 4.00%. Maturity: Dec 1, 2007.
- Collateral: First priority lien on accounts receivable; first priority lien on remaining unencumbered assets (aircraft, real estate, slots, etc.).
- Amex Facilities:
- Structure: Two installments of $250 million each ($500 million total) as prepayment for SkyMiles purchases.
- Timing: Initial $250 million paid Dec 1, 2004. Second installment payable no sooner than March 1, 2005.
- Cost: Fee equivalent to interest at LIBOR + 7.75% (floor 3%).
- Collateral: First priority lien on rights to payment from Amex; junior lien on GE Facility collateral.
Material Changes and Covenants
The new agreements impose significant restrictions on Delta's financial operations compared to prior periods:
- Financial Covenants: Requirements to maintain specified levels of unrestricted cash, pledged cash, and EBITDAR (Earnings Before Interest, Taxes, Depreciation, Amortization, and Aircraft Rent). Caps on capital expenditures.
- Restrictions: Limitations on incurring additional debt, making investments, selling assets, paying dividends, or repurchasing stock.
- Mandatory Repayments: Required if Delta sells certain assets, specifically ASA Holdings, Inc. and Comair Holdings, LLC.
- GECC Arrangements: Amendments to existing agreements allow for a higher collateral value test threshold (60% vs 50%) and increased subordinated debt capacity ($160 million vs $110 million).
Outlook, Risks, and Contingencies
- Liquidity Risk: Borrowing availability under the Revolver and Term Loan is subject to borrowing bases tied to the book value or fair market value of specific assets (receivables, aircraft, real estate). If outstanding loans exceed these bases, immediate repayment is required.
- Default Risk: Customary events of default include cross-defaults to other debt. Upon default, all obligations may be accelerated.
- Operational Constraints: The facility includes an option for GECC to lease up to twelve CRJ-200 aircraft to Delta or its Connection carriers through November 2005.
Investor Verification Checklist
- Verify the current status of the $250 million second installment under the Amex Facilities and whether conditions precedent were met.
- Monitor Delta's EBITDAR and unrestricted cash levels to ensure compliance with new financial covenants.
- Assess the impact of the borrowing base limitations on future liquidity, particularly regarding the valuation of aircraft and receivables.
- Review any potential asset sales of ASA or Comair, which would trigger mandatory debt repayments.
- Confirm the interest rate environment relative to the LIBOR floors (3%) embedded in the new debt instruments.