SAN FRANCISCO — The Los Angeles World Airports Board of Directors on Monday agreed to a $75 million settlement with bondholders in a seven-year-old dispute over United Airlines special facilities revenue bonds sold to make improvements at Los Angeles International Airport.
The $75 million payment to bondholders will come first from a $22 million rent escrow fund and from the sale of 579,348 shares of stock in United’s parent, UAL Corp., valued at about $4 million to $5 million at recent share prices. LAWA, the owner of LAX and three smaller airports, agreed to pay the residual of the $75 million settlement, but not more than $52.7 million.
The bonds were issued in the early 1980s by the Regional Airports Improvement Corp. to fund construction of United’s terminals 7 and 8 at LAX in the run up to the 1984 Los Angeles Olympics. About $59.3 million of principal remains outstanding, and with other charges, the bondholders’ claim has grown to $94 million since United declared bankruptcy in 2002.
“In exchange for its payment under the settlement, United and LAWA will amend and restate United’s terminal 7 and 8 lease,” LAWA said in a statement. “Under the amended lease, United’s rents will increase significantly.”
LAX spokeswoman Nancy Suey Castles said the airport will regain control of the terminals and recoup its money through the increased rents over the term of the lease.
The increases will be phased in between now and 2014 and will bring United’s rents up to market rates. The current 1980s-era leases are well below market rates.
“The settlement also supports LAWA’s strategic goal of implementing a unified capital charge for terminal facilities that will create a more sustainable approach to financing future capital improvements,” the airport operator said in its statement.
The U.S. Bankruptcy Court and the Los Angeles City Council must also approve the settlement. UMB Bank NA was the trustee representing bondholders in the case.
The settlement brings to an end a long-running dispute that broke new ground in bankruptcy and bond law.
UAL Corp. declared bankruptcy in 2002 after a recession and terror attacks decimated its business. That forced a bankruptcy judge to decide whether the airline’s lease-backed revenue bonds at LAX, San Francisco International Airport and John F. Kennedy International Airport in New York were leases or actually loans.
Bankrupt companies have to continue to pay their lease obligations or give up use of rented facilities under Section 365 of the bankruptcy code, but they can reduce payments on loans to match the current economic value of the underlying assets.
In 2005, the United States Court of Appeals for the Seventh District settled the controversy by ruling that the leases were actually loans and subject to adjustment in bankruptcy.
The ruling seemingly reduced bondholder security under such special facilities deals, but it set off another round of battles and appeals court rulings over the proper valuation of United’s LAX facilities, the discount rates to be applied to the new values, and whether the debt was secured or unsecured.
In the end, the Seventh District ruled that the value of the leases was higher than United believed and high enough to justify full recovery by bondholders, setting the stage for this week’s settlement.