United Airlines 2009 Annual Report Download - page 118

Table of Contents
Variable Interest Entities
The Company evaluated whether the trusts formed for its EETC financings are variable interest entities (“VIEs”) required to be consolidated by the
Company under ASC Topic 810, Consolidations, and determined that the trusts are VIEs. The Company evaluated whether there is an implicit or explicit
arrangement that absorbs variability from the trusts. Based on the Company’s analysis as described below, the Company determined that it does not absorb
variability of the trusts and that it does not have a variable interest in the trusts.
The Company evaluated the design of the trusts, including (1) the nature of the risk in the trusts and (2) the purpose for which the trusts were created and
the variability that the trusts are designed to create and pass along to their variable interest holders. The primary risk of the trusts is credit risk (i.e. the risk that
United, the issuer of the equipment notes, may be unable to make its principal and interest payments). The purpose of the trusts is to enhance the credit
worthiness of United’s debt obligation through certain bankruptcy protection provisions, a liquidity facility (in certain of the EETC structures) and improved
loan-to-value ratios for more senior debt classes. These credit enhancements lower United’s total borrowing cost. The other purpose of the trust is to receive
principal and interest payments on the equipment notes purchased by the trusts from United and remit these proceeds to the trusts’ certificate holders.
United did not invest in or obtain a financial interest in the trusts. Rather United has an obligation to make its interest and principal payments on its
equipment notes held by the trusts. By design, United was not intended to have any voting or non-voting equity interest in the trusts or to absorb variability from
the trusts. Based on this analysis, the Company determined that it is not required to consolidate the trusts under ASC Topic 810, Consolidations.
2008 Financings
In June 2008, United entered into an $84 million credit agreement secured by three aircraft, including two Airbus A320s and one Boeing B777.
Borrowings under the agreement are at a variable interest rate based on LIBOR plus a margin. The loan has a final maturity in June 2015.
In July 2008, United completed a $241 million credit agreement secured by 26 of the Company’s owned A319 and A320 aircraft. Borrowings under the
agreement were at a variable interest rate based on LIBOR plus a margin. Periodic principal and interest payments are required until the final maturity in June
2019. The Company may not prepay the loan prior to July 2012. This agreement did not change the number of the Company’s unencumbered aircraft as the
Company used available equity in these previously mortgaged aircraft as collateral for this financing.
See Note 13, “Commitments, Contingent Liabilities and Uncertainties,” for a discussion of the Company’s municipal bond guarantees.
Other Debt
Push Down of UAL Securities. The following instruments issued by UAL have been pushed down to United and are reflected as debt of United.
4.5% Senior Limited-Subordination Convertible Notes due 2021 (the “4.5% Notes”). The 4.5% Notes are unsecured, mature on June 30, 2021 and do not
require any payment of principal prior to maturity. Interest is payable semi-annually, in arrears. The 4.5% Notes may be converted, at the noteholders’ option,
into shares of UAL common stock. The conversion price, which was initially $34.84 per share, is subject to adjustment for certain dilutive items and events.
Effective January 10, 2008, the conversion price was adjusted to $32.64 per share due to UAL’s January 23, 2008 special distribution to holders of UAL common
stock. The 4.5% Notes are junior, in right of payment upon liquidation, to the Company’s obligations under the 5% Notes (as defined
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