Lead Manager

BABCOCK & BROWN PROSPECTUS
Case study United Airlines financing and bankruptcy restructuring advisory
Babcock & Brown began to develop a relationship with UAL in 1999 and 2000, working with them on
several cross-border financings and lease restructurings using techniques developed by Babcock & Brown
that generated significant savings for UAL. Following a successful financing of a 777 aircraft for UAL in
2001, Babcock & Brown was hired by UAL to assist in structuring and negotiating a lease financing of nine
Airbus A320s and emerged as UAL’s primary lease advisor. Later in 2002, Babcock & Brown was engaged
to assist UAL in restructuring its privately-financed secured debt and leasing transactions.
UAL filed for protection under Chapter 11 of the US Bankruptcy Code in December 2002. Babcock &
Brown was retained as financial advisor in connection with the restructuring of all of their financings
covering over 500 aircraft. Pursuant to the UAL mandate, Babcock & Brown’s key responsibilities included:
• Developing a comprehensive strategy to achieve targeted financial cost savings
• Identifying issues and potential savings for each type of financing including US leases, cross-border
(French, German and Japanese) leases, private and public secured debt
• Establishing current valuations for each aircraft type in the UAL fleet
• Conducting market-based auctions for private secured debt financing
• Assisting in negotiations with all financing parties
• Organising detailed information and performing multiple analysis
Babcock & Brown has to date been retained for approximately 21 months on the assignment.
Key drivers
Over the last two years the market for aircraft finance leasing has declined substantially.This reflects the substantial
downturn during this period in the international aviation and tourism markets driven by recession, terrorist acts,
the Iraq war and SARS.This has been particularly severe in the US for major airlines who have suffered major
operating losses, deteriorating balance sheets and bankruptcies. For smaller low-cost and regional operators
conditions have remained relatively stable, although financing capacity in this sector is currently severely strained.
In addition, fuel prices have risen dramatically and intense competition from low cost carriers has driven air fares
lower even as passenger load factors have recovered along with the economic rebound. One ancillary impact of
the decline in the US aviation market has been a simultaneous decline in the credit quality amongst airlines. As a
result many of the traditional participants in lease equity and secured debt, notably banks and industrial credit
companies, have also withdrawn from the industry, which along with further rationalisation of the US banking
industry through mergers and acquisitions has resulted in a significant reduction in available financing for the
aviation market in the US.
Major carriers outside the US have not been as adversely affected and have significant aircraft deliveries to
finance over the next several years.These international carriers continue to have access to their traditional
financing sources, principally export credit agencies, banks and operating lessors.
Key risks
The key risk to the business is that the airline industry, especially in the US, does not rebound profitably and the
finance markets remain virtually closed to most of the major US carriers. Countering this, to some extent, may
be an increased number of bankruptcies which may precipitate additional bankruptcy-related advisory
assignments and asset trading opportunities.
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