Distressed: United Airlines Bankruptcy Terms Announced

One of the things I look for is real-life examples of alternative investments, which allow students to put sometimes unfamiliar concepts in some context. Distressed secuities investing has been a very good area over the last few years, partially as a result of the credit cycle and partially as a result of supply.

The United Airlines bankruptcy is one I have personally followed because I was short a small amount of common stock. So I'm keenly aware that the process has taken three years. Finally, a reorganization plan is on the table and February 2006 is the tentative date. The terms of the deal are contained in this Rocky Mountain News article.

Basically, the senior debt holders have been paid off in full and the unsecured junior debt holders are looking at 4-8 cents return on approximately $30 billion in outstanding debt. The payment will be in the form of new equity.

Several creditors faced with getting back five cents on the dollar indicate they are unhappy, but:

"If, in fact, unsecured creditors are getting what's left over after the senior creditors are paid in full, they can't say they're not getting paid enough because that's all that is left," said Douglas Baird, a University of Chicago law professor.

Since assets are not sufficient to pay off the junior debt holders, it follows that the old equity is worthless and the article makes this clear:

Stockholders will get completely wiped out and won't be able to vote on the plan.

But of course, the old common shares are still trading for 62.5 cents as of November 28. Even though the company advised in June 2003:

"...the company believes that its equity securities have little or no value and it is highly likely that the equity in UAL will be canceled under any plan of reorganization proposed by the company."

So much for efficient markets.