Financial Accounting Blog

Monday, June 21, 2004

United Parent Seeks Investors

September 11,2001 brought an onset of several problems for the United States, more specifically in the airline industry. Americans had a fear of flying, which caused the airline industry earnings to plummet. As a result many airlines went under. United Airlines, the number two airline, was no exception. It filed for bankruptcy, Chapter 11, in December of 2002. Today, has reported that United Airlines is seeking $500 million in new equity in United's bankrupt company, UAL Corp. {UALAQ), which they believe will reduce the size of the federal guarantee.

The $2 billion that United sought from the federal government as financial backing, was vital in United's "restructuring". However, things don't seem to be looking good, since the Air Transportation Stabilization Board rejected United's proposal for a loan guarantee. Not to mention this was the second time for the rejection.

The plan is that,
"United would seek funds from private equity investors, possibly augmented by the issuance of UAL subordinated debt."

This article gives an analysis of debt versus equity financing. Debt and equity financing provide different opportunities for raising funds. As this article entails, a commercially acceptable ratio between debt and equity financing should be maintained. From the lenders' perspective, the debt-to-equity ratio measures the amount of available assets or "cushion" available for repayment of a debt in the case of default.