United Airlines 2008 Annual Report Download - page 125

the number of the Company’s unencumbered aircraft as the Company used available equity in these
previously mortgaged aircraft as collateral for this financing.
EETC Pass Through Certificates, Series 2007-1. On June 26, 2007, United and Wilmington
Trust Company, as subordination agent and pass through trustee under three pass through trusts newly
formed by United (the “Trustee”) entered into a note purchase agreement, dated as of June 26, 2007
(the “Note Purchase Agreement”). The Note Purchase Agreement provides for the issuance by United
of equipment notes (the “Equipment Notes”) in the aggregate principal amount of approximately
$694 million to finance 13 aircraft owned by United. Ten of these owned aircraft had been financed by
pre-existing aircraft mortgages which United repaid in full (approximately $590 million principal
amount) with most of the proceeds of the Equipment Notes. The mortgages related to these ten aircraft
had been adjusted to fair market value at the adoption of fresh-start reporting on February 1, 2006. The
extinguishment of the aircraft mortgages resulted in the recognition of a $22 million gain for the
unamortized premium, which was accounted for as a reduction in interest expense in the second quarter
of 2007. The remaining three owned aircraft were unencumbered prior to the closing of the Enhanced
Equipment Trust Certificates (“EETC”) transaction.
The payment obligations of United under the Equipment Notes are fully and unconditionally
guaranteed by UAL. The Class B and Class C certificates are subject to transfer restrictions. They may
be sold only to qualified institutional buyers, as defined by Rule 144A under the Securities Act of 1933,
as amended, for so long as they are outstanding. Pursuant to the Note Purchase Agreement, the Trustee
for each pass through trust agreed to purchase Equipment Notes issued under a Trust Indenture and
Mortgage (each, an “Indenture” and, collectively, the “Indentures”) with respect to each aircraft
financing entered into by United and Wilmington Trust Company, as Mortgagee.
Each Indenture contemplated the issuance of Equipment Notes in three series: Series A, bearing
interest at the rate of 6.636% per annum, Series B, bearing interest at the rate of 7.336% per annum,
and Series C, bearing interest at the rate of six-month LIBOR plus 2.25% per annum, in the aggregate
principal amount of approximately $694 million divided between the three series as follows: $485 million
in the case of Series A Equipment Notes, $107 million in the case of Series B Equipment Notes and
$102 million in the case of Series C Equipment Notes. The Equipment Notes were purchased by the
Trustee for each pass through trust using the proceeds from the sale of Pass Through Certificates,
Series 2007-1A, Pass Through Certificates, Series 2007-1B and Pass Through Certificates, Series 2007-1C
(collectively, the “Certificates”).
Interest on the Equipment Notes is payable semiannually on each January 2 and July 2, beginning
on January 2, 2008. Principal payments are scheduled on January 2 and July 2 in scheduled years,
beginning on January 2, 2008. The final payments will be due on July 2, 2022, in the case of the Series A
Equipment Notes, July 2, 2019, in the case of the Series B Equipment Notes and July 2, 2014, in the
case of the Series C Equipment Notes. Maturity of the Equipment Notes may be accelerated upon the
occurrence of certain events of default, including failure by United to make payments under the
applicable Indenture when due or to comply with certain covenants, as well as certain bankruptcy events
involving United. The Equipment Notes issued with respect to each of the 13 aircraft are secured by a
lien on each such aircraft and are cross-collateralized by the rest of the 13 aircraft financed pursuant to
the Note Purchase Agreement.
Distributions on the Certificates are subject to certain subordination provisions whereby Morgan
Stanley Senior Funding, Inc. provided a liquidity facility for each of the Class A and Class B certificates.
The liquidity facilities are expected to provide an amount sufficient to pay up to three semiannual
interest payments on the certificates of the related pass through trust. The Class C certificates do not
have the benefit of a liquidity facility.
The Company evaluated whether the trusts formed for the above EETC financing are variable
interest entities (“VIEs”) required to be consolidated by the Company under FASB Interpretation
No. 46 (revised December 2003), Consolidation of Variable Interest Entities, (“FIN 46R”). Additionally,
the Company considered the guidance in FASB Staff Position FIN 46R-6, Determining the Variability to
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