[Pesqueeb]

Maybe this is not your area of expertise but you guys are more qualified than anyone else I know to answer this question. Help me settle a work argument.
The airline I work for just floated UAL are rather large chunk of change.

The agreement outlines that SkyWest will provide a loan to United Airlines in the amount of $80 million with an interest rate of 11% over a ten-year amortization period. The loan is secure, and extends the scope of our current United Capacity Purchase agreement. The loan includes an additional lending facility for up to $49 million at a rate of 8%, for a loan totaling up to $129 million

Is 11 percent normal for a figure that large, or is it just that United cant get credit at a lower rate? Seems like usury to me. Thats almost credit card rates.

 

[dante]

Rates are based on the lender's perception that you'll be able to pay it back (or to get something of equal value). Your house doesn't move, so if you can't pay your mortgage the bank can just take the house instead (and it's *supposed* to always be worth more than what you owe on it). Hence rates are relatively low. Cars are also a tangible asset, but they can be moved and so they're harder to repossess. Usually .5-2% pts higher rate. Personal loans/CC have nothing backing them, so they're at the 12%+ rates right now.

11% is probably a reasonable rate to charge a company like UAL that is always teetering on the brink of bankruptcy. Warren Buffet got a similar deal from a MUCH stronger company Goldman Sachs:

The terms of the deal were very positive for Berkshire; Warren Buffet agreed to invest $5 billion in Goldman in exchange for perpetual preferred shares with a dividend yield of 10%. This will set Goldman back roughly $500 million a year, which will be taken directly off their net income in after tax dollars. This means that Berkshire will be making well over $1 million each day from this investment. It will also be extremely expensive for Goldman to redeem these shares, as they must buy them back at a 10% premium

Remember, if UAL goes bankrupt at any point at any point in the next 10 years, any money that's left outstanding would be extremely hard to recuperate. No clue what the terms of the loan are, but it might be similar to a bond where everything's not due until the end (Joker?). In that case, if UAL declares bankruptcy *all* $129m would be in jeopardy.

Also, keep in mind the aspect of "steepening yield curve", which is that longer term investments have a higher yield than short-term investments. 3 month Treasuries are at practically zero percent, but the 10 year is almost 3.5% and the 30y is at 4.275. That builds in the possibility of inflation at some point in the future, so if this was a shorter loan (2-5y) it might be at a much lower interest rate.

TheJoker might be able to provide something more concrete on what rate a company like UAL might be able to get from a 10y bond offering and so drill down a little bit further as to whether 11% is worthwhile or not, but that's a little beyond my pay scale.

 

[dan-o]

Rates are based on the lender's perception that you'll be able to pay it back (or to get something of equal value). Your house doesn't move, so if you can't pay your mortgage the bank can just take the house instead (and it's *supposed* to always be worth more than what you owe on it). Hence rates are relatively low. Cars are also a tangible asset, but they can be moved and so they're harder to repossess. Usually .5-2% pts higher rate. Personal loans/CC have nothing backing them, so they're at the 12%+ rates right now.

11% is probably a reasonable rate to charge a company like UAL that is always teetering on the brink of bankruptcy. Warren Buffet got a similar deal from a MUCH stronger company Goldman Sachs:



Remember, if UAL goes bankrupt at any point at any point in the next 10 years, any money that's left outstanding would be extremely hard to recuperate. No clue what the terms of the loan are, but it might be similar to a bond where everything's not due until the end (Joker?). In that case, if UAL declares bankruptcy *all* $129m would be in jeopardy.

Also, keep in mind the aspect of "steepening yield curve", which is that longer term investments have a higher yield than short-term investments. 3 month Treasuries are at practically zero percent, but the 10 year is almost 3.5% and the 30y is at 4.275. That builds in the possibility of inflation at some point in the future, so if this was a shorter loan (2-5y) it might be at a much lower interest rate.

TheJoker might be able to provide something more concrete on what rate a company like UAL might be able to get from a 10y bond offering and so drill down a little bit further as to whether 11% is worthwhile or not, but that's a little beyond my pay scale.

Very insightful. How does this influence the 2011 footwear and helmet colorways?

 

[dante]

 

[stoney]

Concur with Dante. If you want, I can take a look at the where the new loan falls into their capital structure. Is skywest public, or a removed/independent subsidiary of UAL?

 

[Pesqueeb]

Concur with Dante. If you want, I can take a look at the where the new loan falls into their capital structure. Is skywest public, or a removed/independent subsidiary of UAL?

Sure if you don't have anything else you'd rather be doing, I'd be curious. Skywest is a publicly traded independent company, Stock symbol is Skyw.

Thank you Dante for the educational post.

 

[stoney]

I'll look into it this weekend and see what I can find. Capital structure is a bitch to identify, so if I can't find anything without pulling quarterlies, I'm quitting. just an fyi.