United Airlines 2008 Annual Report Download - page 61

Credit Ratings. In 2008, both Standard & Poor’s and Moody’s Investors Services lowered the
Company’s credit ratings. Standard & Poor’s lowered its ratings from a corporate credit rating of B
(outlook stable) to B- (outlook negative) reflecting expected losses and reduced operating cash flow due
to volatile fuel prices. Meanwhile, Moody’s Investor Services lowered UAL’s corporate family from “B2”
to “Caa1” with a negative outlook and its secured bank rating from “B1” to “B3,” citing record-high fuel
prices and the weak U.S. economy. These credit ratings are below investment grade levels. Downgrades
from these rating levels, among other things, could restrict the availability and/or increase the cost of
future financing for the Company.
Amended Credit Facility Covenants. The Company’s Amended Credit Facility requires compliance
with certain covenants. The Company was in compliance with all of its Amended Credit Facility
covenants as of December 31, 2008 and 2007. In May 2008, the Company amended the terms of certain
financial covenants of the Amended Credit Facility. A summary of financial covenants, after the May
amendment, is included below.
Beginning with the second quarter of 2009, the Company must maintain a specified minimum ratio
of EBITDAR to the sum of the following fixed charges for all applicable periods: (a) cash interest
expense and (b) cash aircraft operating rental expense. EBITDAR represents earnings before interest
expense net of interest income, income taxes, depreciation, amortization, aircraft rent and certain other
cash and non-cash credits and charges as further defined by the Amended Credit Facility. The other
adjustments to EBITDAR include items such as foreign currency transaction gains or losses, increases or
decreases in our deferred revenue obligation, share-based compensation expense, non-recurring or
unusual losses, any non-cash non-recurring charge or non-cash restructuring charge, a limited amount of
cash restructuring charges, certain cash transaction costs incurred with financing activities and the
cumulative effect of a change in accounting principle.
The Amended Credit Facility also requires compliance with the following financial covenants: (i) a
minimum unrestricted cash balance of $1.0 billion, and (ii) a minimum ratio of market value of collateral
to the sum of (a) the aggregate outstanding amount of the loans plus (b) the undrawn amount of
outstanding letters of credit, plus (c) the unreimbursed amount of drawings under such letters of credit
and (d) the termination value of certain interest rate protection and hedging agreements with the
Amended Credit Facility lenders and their affiliates, of 150% at any time, or 200% at any time following
the release of Primary Routes having an appraised value in excess of $1 billion (unless the Primary
Routes are the only collateral then pledged).
The requirement to meet a fixed charge coverage ratio was suspended for the four quarters
beginning with the second quarter of 2008 and ending with the first quarter of 2009 and thereafter is
determined as set forth below:
Number of
Preceding Months Covered Period Ending
Required
Coverage Ratio
Three ............ June 30, 2009 1.0 to 1.0
Six............... September 30, 2009 1.1 to 1.0
Nine ............. December 31, 2009 1.2 to 1.0
Twelve............ March 31, 2010 1.3 to 1.0
Twelve............ June 30, 2010 1.4 to 1.0
Twelve............ September 30, 2010 and each quarter ending thereafter 1.5 to 1.0
The Amended Credit Facility contains a cross default provision with respect to other credit
arrangements that exceed $50 million. Although the Company was in compliance with all required
financial covenants as of December 31, 2008, and the Company is not required to comply with a fixed
charge coverage ratio until the three month period ending June 30, 2009, continued compliance depends
on many factors, some of which are beyond the Company’s control, including the overall industry
revenue environment and the level of fuel costs. There are no assurances that the Company will continue
to comply with its debt covenants. Failure to comply with applicable covenants in any reporting period
would result in a default under the Amended Credit Facility, which could have a material adverse impact
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