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Ual Pulling Out of Bankruptcy

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Submitted By shanshaj
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TROUBLED PAST AND PRESENT
During the fiscal year of 2002, United Airlines faced tremendous pressure from increase in costs, and decline in passengers. United Airlines was in a difficult position to pay off its debt, given that its industry leverage ratios are high compared to other industries. After failure to attain $ 1.8 million in loan guarantees from the Air Transport Stabilization Board, UAL finally filed for bankruptcy protection in December the same year.
ANAYLSIS OF UAL UNDER BANKRUPTCY PROTECTION
The rationale for allowing companies to restructure their debt and operation is to allow companies to have the ability to cut its and raise some much needed cash to continue its operation. “Automatic stay”, under section 1110, which is a specific code in the airline industry, helps to protect creditors whose loans are secured by aircraft. However, “automatic stay” also guarantees a secured loan period of up to 60 days, in which debtors are not obliged to pay back creditors. Once companies like UAL filed for bankruptcy protection, it is virtually impossible for these companies to attract willing creditors to finance these companies. Thus, under the Chapter 11 protection, it allows debt-in-possession (DIP) financing to help these companies to raise needed capital. DIP loan are guaranteed seniority to existing creditors, which are incentives to creditors to provide funds to companies under bankruptcy protection.
From the perspective of UAL, attracting more creditors to provide capital in restructuring UAL is certainly an effective way to emerge from Chapter 11. However, not every party has the incentive to be involved. For secured creditors such as DIP lenders, will be more willing to invest in UAL because their investment is secured. As DIP lenders loaning to business, they must be repaid as a precondition for existing bankruptcy. This is also the case that

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