Delta, Northwest Creditors to Begin Tussle

The collapse of Delta Air Lines Inc. and Northwest Airlines Corp. has set into motion a classic battle between three classes of investors, with the mostly unknown list of secured creditors potentially poised to seize control and dictate the carriers' futures.

Bankruptcies typically wipe out equity investors, and leave most unsecured bondholders receiving an average of 25 cents on the dollar, corporate debt consultants said. But those secured creditors - a list that could include venture capitalists and major corporations - are expected to remain in the shadows until both airlines go before bankruptcy courts.

Negotiations between secured creditors and management teams during Chapter 11 proceedings have created some of the most storied takeovers in corporate history. Wall Street raider Carl Icahn seized control of bankrupt Trans World Airlines in 1986 through his significant stake in the airline. Hedge fund investor Edward Lampert used his stake in discount retailer Kmart to orchestrate the takeover of Sears Holding Corp.

"A lot of the bonds are in the hands of so-called venture capitalists, some call them vulture capitalists, who specifically look to buy distressed debt and hope to work the bankruptcy system," said Martin Fridson, a former chief fixed-income strategist at Merrill Lynch who now publishes the "Distressed Debt Investor." "They all have different strategies, and the question is, is there another Carl Icahn waiting to use their stake to buy the company?"

That question might only become more clear once bankruptcy proceedings begin, he said, as many of the secured creditors have not been disclosed. The biggest of which are said to include insurance companies, banks, pension funds, corporations and individual investors that own billions of dollars worth of debt.

So far, the only major secured creditor that has disclosed its investment is General Electric Co. The conglomerate said Wednesday that the bankruptcy filings by Delta and Northwest would not affect the company's position. GE's commercial financing unit has about $2.8 billion in outstanding loans with the troubled airlines.

Delta owes about $28 billion to bondholders, creditors and other lenders, according to court documents. The airline has about $5 billion of unsecured bonds, more than any other major U.S. airline, and about $4.5 billion of debt backed by aircraft and equipment, according to a report by Fitch Ratings.

Among the list of the 20 largest unsecured creditors provided by Delta in court documents are affiliates of Boeing Co., with $3.72 billion of investments tied to future aircraft commitments and other assets. In addition, the Bank of New York Corp. and SunTrust Bank Corp. are listed as representatives for billions of dollars of debt owned by unnamed creditors, most likely mutual funds and other investment vehicles.

Northwest's filing listed $17.9 billion in overall debt, with about $8.4 billion owed to bondholders. Both airlines join UAL Corp.'s United Airlines and US Airways Group Inc. who are already in bankruptcy.

Unsecured debtors listed by Northwest include banks such as U.S. Bank National Association and State Street Bank Corp., which represent bondholders of various note offerings. The airline also listed regional carriers such as Pinnacle Airlines Inc. and Mesaba Aviation Inc., and insurance benefits provider Blue Cross Blue Shield, as other major creditors.

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