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The nation's pension insurer would get United Airlines securities and become the trustee of the company's four terminated plans.
Stephen Taub, CFO.com | US
April 28, 2005
Under the terms of a settlement reached with United Airlines regarding the termination of the company’s pension plans, the Pension Benefit Guaranty Corp. (PBGC) has a big stake in the survival and success of UAL.
The agreement, which must be approved by the bankruptcy court overseeing the airline's restructuring, stipulates that the PBGC would settle its claims against UAL by terminating and become trustee of the company’s four pension plans.
According to The New York Times, the PBGC could receive United Airlines securities worth at least $1 billion when the company exits from bankruptcy. At that time, the pension agency would receive two classes of notes and $500 million of convertible preferred stock in UAL, United's parent, the paper reported.
Although the securities reportedly have a face value of $1.5 billion, the market value would most likely be lower, since some of the notes require that United meet a number of financial benchmarks before they can pay out interest.
The agreement also puts the pension agency in a somewhat better position to recoup its outlay than in it usually is, according to the newspaper. Generally, the PBGC has the same status as other unsecured creditors in bankruptcy proceedings. That means that it usually gets just a few cents for each dollar of loss.
Further, its recovery would generally be in the form of stock in the newly organized company, which, of course, can lose value if the company still doesn’t perform well in the market. In this case, however, the UAL notes could be less risky, according to the paper.
Altogether, United’s pension plans are underfunded by $9.8 billion on a termination basis, $6.6 billion of which is guaranteed, according to the PBGC.
The four plans are: the UA Pilot Defined Benefit Plan, which covers 14,100 participants and has $2.8 billion in assets to pay $5.7 billion in promised benefits; the United Airlines Ground Employees Retirement Plan, which covers 36,100 participants and has $1.3 billion in assets to pay $4 billion in promised benefits; the UA Flight Attendant Defined Benefit Pension Plan, which covers 28,600 participants and has $1.4 billion in assets to pay $3.3 billion in promised benefits; and the Management, Administrative, and Public Contact Defined Benefit Pension Plan, which covers 42,700 participants and has $1.5 billion in assets to pay $3.8 billion in promised benefits.