United Airlines 2011 Annual Report Download - page 140

Table of Contents
principal amount of Class B pass-through certificates with a stated interest rate of 6.0%. The proceeds of the issuance of the Class A and Class B pass-
through trusts, which amounted to approximately $427 million, were used to purchase equipment notes issued by Continental. Of the $427 million in
proceeds, $188 million was received in 2010 and the remaining amount was received in 2011. The proceeds were used to fund the acquisition of new aircraft
and in the case of the currently owned aircraft, for general corporate purposes. In 2009, through two transactions Continental created three pass-through trusts
to issue a total of approximately $1.0 billion of certificates. In connection with these transactions, Continental issued $390 million of equipment notes in 2009
and $644 million of equipment notes in 2010. The proceeds from the issuances were used to finance the acquisition of new aircraft and in the case of the
currently owned aircraft, for general corporate purposes. Consistent with the United EETC structure described above, Continental records the debt obligation
upon issuance of the equipment notes rather than upon the initial issuance of EETCs. See Note 16 for additional information related to the Continental
EETCs.
Continental EETCs Secured by Spare Parts Inventory . Continental has two series of notes totaling $304 million, which bear interest at LIBOR plus a
margin that are secured by the majority of its spare parts inventory. In connection with these equipment notes, Continental entered into a collateral maintenance
agreement requiring it, among other things, to maintain a loan-to-collateral value ratio of not greater than 45% with respect to the senior series of equipment
notes and a loan-to-collateral value ratio of not greater than 75% with respect to both series of notes combined. Continental must also maintain a certain level of
rotable components within the spare parts collateral pool. These ratios are calculated semi-annually based on an independent appraisal of the spare parts
collateral pool. If any of the collateral ratio requirements are not met, Continental must take action to meet all ratio requirements by adding additional eligible
spare parts to the collateral pool, redeeming a portion of the outstanding notes, providing other collateral acceptable to the bond insurance policy provider for
the senior series of equipment notes or any combination of the above actions.
Convertible Debt Securities
Following the Merger, UAL, Continental and the trustees for Continental’s 4.5% Convertible Notes due 2015 (the “Continental 4.5% Notes”), 5% Convertible
Notes due 2023 (the “Continental 5% Notes”) and 6% Convertible Junior Subordinated Debentures due 2030 (the “6% Convertible Debentures”) entered into
supplemental indenture agreements to make Continental’s convertible debt, which was previously convertible into shares of Continental common stock,
convertible into shares of UAL common stock. For purposes of the Continental separate-entity reporting, as a result of the Continental debt becoming
convertible into the stock of a non-consolidated entity, the embedded conversion options in Continental’s convertible debt are required to be separated and
accounted for as though they are free-standing derivatives. As a result, the carrying value of Continental’s debt, net of current maturities, on a separate-entity
reporting basis as of December 31, 2011 and December 31, 2010 was $4,957 million and $5,536 million, respectively, which is $64 million and $73
million, respectively, lower than the consolidated UAL carrying values on those dates.
In addition, UAL’s contractual commitment to provide common stock to satisfy Continental’s obligation upon conversion of the debt is an embedded call
option on UAL common stock that is also required to be separated and accounted for as though it is a free-standing derivative. The fair value of the indenture
derivatives on a separate-entity reporting basis as of December 31, 2011 and December 31, 2010 was an asset of $193 million and $286 million, respectively.
The fair value of the embedded conversion options as of December 31, 2011 and December 31, 2010, was a liability of $95 million and $164 million,
respectively. The initial contribution of the indenture derivatives to Continental by UAL is accounted for as additional-paid-in-capital in Continental’s separate-
entity financial statements. Changes in fair value of both the indenture derivatives and the embedded conversion options subsequent to October 1, 2010 are
recognized currently in nonoperating income (expense).
Continental 4.5% Notes. The Continental 4.5% Notes are convertible into UAL common stock at a conversion price of approximately $18.93 per share.
Continental does not have the option to pay the conversion price in cash; however, holders of the notes may require Continental to repurchase all or a portion of
the notes for cash at par plus any accrued and unpaid interest if certain changes in control of Continental occur.
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