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Delta Seeks to Halt LAX Bond Payments

October 14, 2005|From Bloomberg News

Delta Air Lines Inc. sued the city of Los Angeles, seeking court permission to stop making payments on bonds used to finance its facilities at Los Angeles International Airport.

The No. 3 U.S. carrier, which filed for bankruptcy protection last month, asked the U.S. Bankruptcy Court in New York to classify the payments as unsecured debt. Bankruptcy law would then prohibit the airline from paying on the bonds while it reorganizes, according to the suit filed late Wednesday.

Delta is asking the court for an order blocking the airport from evicting it. Eviction would leave the airline without a presence in the nation's fifth-busiest airport, from which Delta has 43 daily departures, spokesman Anthony Black said.

Delta didn't disclose how much the monthly payments were. Harold Johnson, a spokesman for the airport, declined to comment.

Los Angeles' Regional Airports Improvement Corp. issued Delta $88 million in bonds in 1996 to refinance an earlier series of bonds issued to the airline in 1985. Delta used the original series to finance an expansion of its facilities at the airport, according to court documents. The airport improvement corporation was also named as a defendant.

The bonds' prices have declined in recent months, pushing up their yields, as bankruptcy appeared imminent. They last traded between securities dealers Sept. 20 for 79 cents on the dollar, down from 83 cents in a similar transaction a month before, according to reports from the Municipal Securities Rulemaking Board.

Companies operating under Chapter 11 protection are shielded from lawsuits. They can sue creditors to prevent them from taking measures that violate bankruptcy law. In this case, Delta contends that a forced payment would be a violation.

UAL Corp.'s United Airlines stopped paying interest on bonds tied to airport leases at New York, Denver, Los Angeles and San Francisco after its 2002 bankruptcy filing, setting off a legal battle, which is still in the courts, that has cut the value of the tax-exempt bonds tied to the airline's terminal leases.

"Investors haven't been paid in nearly three years," said Mark McCray, who oversees $15 billion of municipal bonds for Newport Beach-based Pacific Investment Management Co.

The airlines' stance on their tax-exempt bonds during bankruptcy proceedings may saddle them with higher borrowing costs for such debt in the future because of concern among investors that the next round of bankruptcies will bring new defaults.

"As many muni market participants predicted, the entire tax-exempt airport financing mechanism is now broken, given some of the precedents set in the UAL case," McCray said. "Airlines and airports will need to issue future debts at highly inflated yields."

Delta filed for bankruptcy on Sept. 14, the same day as Northwest Airlines Corp. Planes with about half the nation's airline seats are now operated by companies that have entered bankruptcy protection.

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