TEXT-S&P raises United Continental snr unsecured rating, affirms CCR

Tue Nov 20, 2012 3:08pm EST

Overview
     -- We expect United Continental Holdings to report weaker earnings this 
year than in 2011 as a result of merger integration costs and higher fuel 
prices.
     -- Still, credit measures are acceptable for the rating, and we expect 
performance to improve in 2013.
     -- We are affirming our 'B' corporate credit rating on the company and 
raising our recovery and issue ratings on its senior unsecured debt and 
second-lien secured debt. We also changed ratings on selected enhanced 
equipment trust certificates.
     -- The stable outlook reflects our expectation for improvement in credit 
measures in 2013, but not likely to levels sufficient to support an upgrade.

Rating Action
On Nov. 20, 2012, Standard & Poor's Ratings Services affirmed its 'B' 
corporate credit rating on United Continental Holdings Inc. (UCHI). We
raised our issue ratings on the company's senior unsecured debt and second-lien 
secured debt to 'B', equal to the corporate credit rating, from 'B-'. We 
revised our recovery rating on that debt to '4', indicating our expectation of 
average (30%-50%) recovery in a default scenario, from '5'. Although we do not 
assign recovery ratings to airport revenue bonds, we raised our issue ratings 
to 'B' from 'B-' on airport revenue bonds that we classify as equivalent to 
senior unsecured debt. We also raised or lowered our issue ratings on selected 
enhanced equipment trust certificates (see ratings list), based on our 
assessment of changes in collateral coverage.

Rationale
Chicago, Ill.-based United Continental Holdings Inc., parent of United Air 
Lines Inc. and Continental Airlines Inc. (each rated B/Stable/--),  has 
reported weaker earnings this year than in 2011 because of merger-related 
costs and integration problems, as well as higher fuel costs. We expect the 
company to report a net loss, after substantial merger-related special 
charges, of several hundred million dollars, but to return to profitability 
next year. Our base-case scenario assumptions include:
     -- U.S. real GDP growth of 2.1% in 2012 and 2.3% in 2013;
     -- Crude oil (WTI) averages about $94 this year and $89 next year, with 
crack spreads and other costs that result in jet fuel costs of $3.20-$3.30 per 
gallon this year and $3.00-$3.10 in 2013;
     -- Consolidated capacity (available seat miles) shrinks about 1.3% this 
year and another 1% next year; 
     -- Passenger revenues per available seat mile rise 1.6%-1.8%  this year 
and about 2% next year as the company works through some of its merger-related 
operational problems but the economy remains soft; and
     -- Nonfuel operating cost per available seat mile rises close to 3% this 
year and another 3% in 2013 (not including the effect of mostly merger-related 
special charges).

In this scenario, we project the following key credit measures:
     -- EBITDA interest coverage of 1.3x-1.5x this year (well below the 2.4x 
generated in 2011), recovering to about 2x next year;
     -- Funds flow to debt of 9%-10% this year (compared with 13% in 2011), 
and 11%-12% in 2013; 
     -- Debt to EBITDA rising to 8.5x-9.0x in 2012, from 6.2x last year, 
before recovering to about 6.5x in 2013; 
     -- We also consider debt to EBITDAR because of airlines' heavy use of 
leasing, and that measure is not as highly leveraged: 4.6x in 2011, 5.5x-6.0x 
this year, and we expect 4.5x-5.0x next year.

These credit measures, though below our previous expectations, are acceptable 
for the rating, particularly given that we expect revenue synergies from the 
merger of United and Continental to build over time, though labor costs will 
also rise. We base our corporate credit ratings (CCRs) on  United Continental 
and its subsidiaries on the consolidated credit profile of the parent company. 
Our ratings reflect United Continental's substantial debt and lease burden, 
and  risks associated with participation in the volatile U.S. airline 
industry. The company's substantial market position as the largest U.S. 
airline with a broad route network is a positive. Under our criteria, we 
categorize UCHI's business risk profile as "weak," its financial profile as 
"highly leveraged," and its liquidity as "adequate."

Our rating changes on selected enhanced equipment trust certificates (EETCs) 
are based on trends in collateral value that are outside of our previous 
expectations for the affected issues.  The upgrades were mostly on older EETCs 
that have paid down debt more rapidly than the collateral aircraft value 
declined.  However, in the case of several senior certificates secured by 
regional jets, we raised the ratings to 'B' from 'B-' not because of positive 
trends in the values of those planes, but rather because we raised the senior 
unsecured debt ratings of United Continental and its airline subsidiaries. 

Although we do not assign recovery ratings to enhanced equipment trust 
certificates, secured creditors are entitled to a senior unsecured claim for 
any shortfall in the value of their collateral relative to what they are owed, 
and we accordingly equalized our issue ratings on these certificates with our 
revised senior unsecured ratings. The downgrades were mostly of more recent 
EETCs, where collateral aircraft values (including current technology planes 
that were about 10 years old when refinanced through these EETCs) have fallen 
faster than we previously expected. Our review of United and Continental EETCs 
included enhanced aircraft notes issued by special purpose entity Air 2 US 
LLC, which leases A320-200 aircraft to United. We affirmed the existing 'BB' 
rating on the Class A notes and 'B-' rating on the Class B notes.

Liquidity
We view UCHI's liquidity as "adequate." The company ended the third quarter 
with $7.2 billion in liquidity (unrestricted cash and short-term investments 
plus undrawn committed credit lines). This is about 19% of trailing-12-months 
revenues, lower than in previous quarters this year but still similar to the 
like ratio for other large "legacy" U.S. airlines. Going forward, sources of 
funds will mostly consist of cash, funds from operations (FFO), and borrowings 
(including $1.7 billion raised through offerings of EETCs in the first and 
third quarters).

Recovery analysis
We raised our issue ratings on United Continental's, United Air Lines' and 
Continental Airlines' senior unsecured debt to 'B' from 'B-', and revised the 
recovery rating to '4', indicating our expectation of average (30%-50%) 
recovery in a default scenario, from '5'. United Continental has been 
gradually upgrading its aircraft fleet, and our modeling of the default 
scenario, which takes a discrete asset approach to estimating an enterprise 
value, applies lesser stresses to the value of newer, widely used planes than 
older ones. Also, the company has paid down some debt over the past year, 
improving asset coverage. We affirmed our '5' recovery rating, indicating our 
expectation of modest (10%-30%) recovery on United Continental's 4.5% limited 
subordination notes due 2021. United guarantees these notes, but they could be 
subordinated to certain unrated notes given to the Pension Benefit Guaranty 
Corp.

We rate United's 9.875% senior secured notes 'BB-' (two notches above the CCR) 
with a recovery rating of '1', indicating our expectation of a very high 
(90%-100%) recovery in a default scenario. We rate United's second-lien notes 
and senior unsecured debt 'B' (equal to the CCR) with a recovery rating of 
'4'. We rate UCHI's 6% senior convertible notes due 2029, which are 
structurally subordinated and not guaranteed by United, 'CCC+' with a '6' 
recovery rating, indicating our expectations of negligible (0-10%) recovery in 
a default scenario. 

We rate Continental's 6.75% senior secured notes due 2015 'BB-' (two notches 
above the CCR) with a recovery rating of '1'. We rate Continental's senior 
unsecured debt 'B' (equal to the CCR) with a recovery rating of '4'. 

For the complete recovery analysis, see our recovery report on UCHI to be 
published later on RatingsDirect.


Outlook
The outlook is stable. We don't expect to change our CCRs on United 
Continental or its subsidiaries over the next year. However, we could raise 
our ratings if strong earnings and faster-than-expected achievement of merger 
synergies allows the consolidated entity to generate adjusted FFO to debt 
consistently at least in the mid-teens percent area. On the other hand, we 
could lower our ratings if financial results deteriorate such that FFO to debt 
falls into the mid-single-digit percentage area. This could happen in adverse 
industry conditions, possibly resulting from a major recession or 
much-worse-than-anticipated merger integration problems.

Related Criteria And Research
     -- Key Credit Factors: Criteria For Rating The Airline Industry, Oct. 22, 
2010
     -- Criteria Guidelines For Recovery Ratings On Global Industrials 
Issuers' Speculative-Grade Debt, Aug. 10, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- Criteria for Rating Aircraft-Backed Debt and Enhanced Equipment Trust 
Certificates, Sept. 12, 2002

Ratings List
Ratings Affirmed

United Continental Holdings Inc.
 Corporate Credit Rating                  B/Stable/--

Continental Airlines Inc. 
 Corporate Credit Rating                  B/Stable/-- 
 Senior Secured                           BB- 
 Preferred Stock Convertible              CCC 
 All EETCs affirmed except ser 1996-B, 1996-C, 1996-2B, 1996-2C, 1997-1A, 
1998-1B, 2000-2A1, 2003-ERJ1A, 2004-ERJ1A, 2009-1A, 2009-2A, 2009-2B

United Air Lines Inc. 
 Corporate Credit Rating                  B/Stable/-- 
 All EETCs affirmed, except 2007-1C 

AIR 2 US LLC
 Class A enhanced aircraft notes          BB-
 Class B enhanced aircraft notes          B-

Ratings Affirmed; Recovery Ratings Remain Unchanged 

United Continental Holdings Inc. 
 4.5% ltd subord convert. nts due 2021    B-
  Recovery Rating                         5
 6.0% sr nts convertible due 2029         CCC+
  Recovery Rating                         6

Continental Airlines Inc. 
 Senior Secured                           BB-
  Recovery Rating                         1

United Air Lines Inc.
 Senior Secured 
  US$1.2 bil term fac bank ln due 2014    BB-
   Recovery Rating                        1
  US$500 mil 9.875% nts due 2013          BB-
   Recovery Rating                        1

Upgraded
                                          To         From

Continental Airlines Inc.
 Equipment Trust Certificates
  7.82% pass-thru ser 1996-B              BB-       B+
  9.5% pass-thru ser 1996-C               B+        B
  8.56% pass-thru ser 1996-2B             B+        B
  10.22% pass-thru ser 1996-2C            B         B-
  7.461% pass-thru ser 1997-1A            BB-       B+
  6.748% pass-thru ser 1998-1B            BB+       BB
  7.875% pass-thru ser 2003-ERJ1A         B         B-
  9.558% pass-thru ser 2004-ERJ1A         B         B-  
 Senior Unsecured                         B         B-

United Air Lines Inc. 
 2.553% pass-thru series 2007-1C          B         B-

Upgraded; Recovery Ratings Revised
                                          To        From 
Continental Airlines Inc.
 Senior Unsecured 
  4.5% sr convertible notes 2015          B         B-
   Recovery Rating                        4         5 

United Air Lines Inc.
 Senior Secured
  12% 2nd lien notes                      B         B-
   Recovery Rating                        4         5

Downgraded
                                          To        From 
Continental Airlines Inc.
 Equipment Trust Certificates
  7.707% pass-thru ser 2000-2A1           BBB-      BBB
  9% pass-thru ser 2009-1A                BBB       BBB+
  7.25% pass-thru ser 2009-2A             BBB+      A-
  9.25% pass-thru ser 2009-2B             BB+       BBB-


Temporary telephone contact numbers: Philip Baggaley (1-646-285-4615); Betsy 
Snyder (1-201-962-0008).
 

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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