United Airlines 2007 Annual Report Download - page 131

UAL Corporation and Subsidiary Companies
Combined Notes to Consolidated Financial Statements (Continued)
(12) Debt Obligations (Continued)
65% of the stock of such subsidiary and such foreign subsidiaries were not required to pledge the stock of their subsidiaries.
As of December 31, 2006, the Company had outstanding borrowings of $2.8 billion of which $2.438 billion was subject to an interest rate of 9.12% with the
remaining balance of $348 million at 9.125%. In addition, letters of credit were issued under the credit facility as of December 31, 2006 in an aggregate amount
of $63 million subject to an interest rate of 3.75%. The Company was in compliance with the credit facility covenants at December 31, 2006.
Push Down of UAL Securities. The following instruments issued by UAL have been pushed down to United and are reflected as debt of United as part of
fresh-start reporting.
Limited-Subordination Notes. In July 2006, UAL issued $726 million aggregate principal amount of 4.5% senior limited-subordination convertible notes
to irrevocable trusts established for the benefit of certain of its employees, including employees under collective bargaining agreements. The notes are unsecured,
mature on June 30, 2021 and do not require any payment of principal before maturity. Interest is payable semi-annually, in arrears. These notes may be converted
into common stock of Successor UAL at any time after October 23, 2006. The conversion price, which was initially $34.84, is subject to adjustment for certain
dilutive items and events. Effective January 10, 2008, the conversion price was changed to $32.64 due to UAL's January 23, 2008 special distribution to holders
of Successor UAL common stock. The notes are junior, in right of payment upon liquidation, to the Company's obligations under the 5% senior convertible notes
and 6% senior notes discussed below. The notes are callable in cash and/or Successor UAL common stock beginning approximately five years after the issuance
date, except that UAL may elect to pay in common stock only if the common stock has traded at not less than 125% of the conversion price for the 60
consecutive trading days immediately before the redemption date. In addition, on each of June 30, 2011 and June 30, 2016, holders have the option to require
UAL to repurchase its notes, which UAL may elect to do through the payment of cash or Successor UAL common stock, or a combination of both.
Pursuant to the Plan of Reorganization, the notes were to have been issued at a conversion price of $46.86, which was calculated as 125% of the average
closing common stock price for the 60 consecutive trading days following February 1, 2006. The Plan of Reorganization also required that the notes bear interest
at a rate so that the notes would trade at par upon issuance. Since the original conversion option was priced significantly out of the money as of the note issuance
date of July 25, 2006, UAL agreed with employee groups to modify the conversion price to make the notes more marketable and to provide UAL with a more
favorable interest rate. This modification did not alter or eliminate the requirement that an interest rate be selected so that the notes would trade at par upon
issuance. Had UAL not modified the conversion price, the interest rate required to meet the par trading requirement would have been significantly higher than
4.5%.
The Company accounted for the July 25, 2006 modification of debt in accordance with EITF Issue No. 96-19, "Debtor's Accounting for a Modification or
Exchange of Debt Instruments" and EITF Issue No. 05-7, "Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues." The Company evaluated the original and modified terms of this debt instrument (including performing a fair valuation of the conversion feature before
and after the modification), and determined that the modification qualified to be accounted for as an extinguishment of debt. As a result, the modified
Limited-Subordination Notes were recorded at fair market value on their date of
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Source: UNITED AIR LINES INC, 10-K, February 29, 2008