Risk & Compliance

Fly Right, PBGC Tells Northwest

Agency insists that the bankrupt airline must disclose to creditors ''what is now, at best, implied and buried between the lines'' — that it will r...
Stephen TaubMarch 26, 2007

Northwest Airlines, which will retain “billions of dollars” in pension liabilities under a bankruptcy reorganization plan, must clarify its financial position for creditors, the Pension Benefit Guaranty Corp. reportedly stated in a court filing.

According to the Associated Press, the PBGC added that the company’s unsecured creditors will own more than 90 percent of the new stock that Northwest plans to swap for their debt when the company finally emerges from Chapter 11 protection.

This is a sensitive issue for the PBGC, which in the past year has agreed to assume pension liabilities for several other airlines.

The bankruptcy disclosure statement that Northwest will send to creditors, the PBGC reportedly stated, “should clearly state what is now, at best, implied and buried between the lines.” Specifically, the government agency affirmed that Northwest and its subsidiaries “do not propose to terminate any of the pension plans,” the wire service reported.

“In order for [creditors] to have adequate information from which to decide whether to exchange their debt claims for equity, they need to understand that, following confirmation of the plan of reorganization, [Northwest] will remain fully liable for all funding, premiums, unfunded pension-benefit liabilities upon termination, and other potential liabilities,” the PBGC elaborated, according to the AP.

In a related development, a group of investors agreed to abide by a court order to disclose their positions in Northwest’s stock, according to Reuters. The ad hoc group — which includes Owl Creek Asset Management, Gracie Capital, Greywolf Capital Management, Jeremy Hosking, Latigo Partners, Marathon Asset Management, Mason Capital Management, Sandell Asset Management, and Taconic Capital Advisors — had asserted that the information is a trade secret and not relevant to the bankruptcy case.

An earlier AP report noted that Northwest’s flight attendants are unhappy with the bankruptcy plan because the airline did not disclose how much its executives and directors will be paid when it emerges from Chapter 11.

The wire service noted that the Association of Flight Attendants, currently working under terms imposed last year by Northwest with the permission of a bankruptcy judge, argued that the cuts they faced came with the understanding that managers would sacrifice, too.

“For that reason, the flight attendants are clearly entitled to disclosure of the amount of management’s post-confirmation compensation, and to some measure of confidence that debtors intend to honor their pledge of shared sacrifice after exit,” union attorneys wrote, according to the AP.

4 Powerful Communication Strategies for Your Next Board Meeting