Delta sues L.A. to cease bond payments

Delta Air Lines Inc., which filed for bankruptcy protection last month, has sued the city of Los Angeles, seeking court permission to stop making payments on bonds used to finance its facilities at Los Angeles International Airport.

The No. 3 U.S. carrier, which has a hub in Salt Lake City, asked the U.S. Bankruptcy Court in New York to classify the payments as unsecured debt. Bankruptcy law would then prohibit the airline from paying on the bonds while it reorganizes, according to the suit filed late Wednesday.

Delta is asking the court for an order blocking the airport from evicting it. Eviction would leave the airline without a presence in the nation's fifth-busiest airport, from which Delta has 43 daily departures, spokesman Anthony Black said.

"Without such a declaration from the court, Delta is at risk that the defendants will invoke non-payment on the bonds as a basis for exercising putative remedies or to interfere with Delta's use and occupancy of its facilities at LAX," Atlanta-based Delta's filing said, using the airport code letters.

Delta didn't disclose how much the monthly payments are. Harold Johnson, a spokesman for the airport, declined to comment.

Los Angeles's Regional Airports Improvement Corp. issued Delta $88 million in bonds in 1996 to refinance an earlier series of bonds issued to the airline in 1985. Delta used the original series to finance an expansion of its facilities, according to court documents. The airport improvement corporation was also named as a defendant in the suit.

The bonds have declined in recent months, pushing up their yields, as bankruptcy appeared imminent. They last traded between securities dealers for 79 cents on the dollar on Sept. 20, down from 83 cents in a similar transaction a month before, according to the Municipal Securities Rulemaking Board's reports.

Companies operating under Chapter 11 bankruptcy protection are shielded from lawsuits. They can sue their creditors to prevent them from taking measures that violate bankruptcy law. In this case, Delta contends a forced payment would violate the law.

UAL Corp.'s United Airlines stopped paying interest on bonds tied to airport leases at New York, Denver, Los Angeles and San Francisco after its 2002 bankruptcy, setting off a legal battle, still in court, that has cut the value of the tax-exempt bonds tied to the airline's terminal leases.

"Investors haven't been paid in nearly three years," said Mark McCray, who oversees $15 billion of municipal bonds for Pacific Investment Management Co. in Newport Beach, California. He wouldn't disclose his holdings.

The airlines' stance on their tax-exempt bonds during bankruptcy proceedings may saddle them with higher borrowing costs for such debt in the future because of concern among investors that the next round of bankruptcies will bring new defaults.

"As many muni market participants predicted, the entire tax- exempt airport financing mechanism is now broken, given some of the precedents set in the UAL case," McCray said. "Airlines and airports will need to issue future debts at highly inflated yields."

Delta filed for bankruptcy on Sept. 14, the same day as Northwest Airlines Corp. Planes with about half the nation's airline seats are now operated by companies that have entered bankruptcy.

Separately, the airline said it has proposed reduced payment terms to 185 aircraft owners. Delta leases planes and equipment from thousands of entities. The airline's fleet has more than 700 jets, according to court documents.

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