Flying High On Chapter 11
James Sprayregen started laying out a bankruptcy strategy for UAL Corp., which owns United Airlines, long before the company filed for Chapter 11 protection in Chicago this past December. In fact, UAL hired Kirkland & Ellis' leading bankruptcy partner shortly after 9/11. Like most U.S. airlines, United prepared for the worst after the terrorist attacks. A crippling decline in air travel and potential mass tort liability from the hijacking of two United planes made bankruptcy a painfully clear prospect. To be ready, the world's second-largest airline wanted an expert on board. Through a beauty contest in fall 2001, the Illinois airline selected Sprayregen, a native son of Chicago, as its counsel.
"We knew he wouldn't have a big learning curve," says UAL general counsel Francesca Maher. After all, Sprayregen, 43, had already earned his airline bankruptcy wings -- having advised the debtor-in-possession (DIP) lenders in Midway Airlines Corp.'s first Chapter 11 reorganization in 1992 and piloted Trans World Airlines Inc. through its third reorganization in 2001. Maher had also worked with Kirkland & Ellis previously, but it was Sprayregen's drive that sealed the deal. "He had the right blend of aggressiveness, intellect and personality," she says.
Sprayregen started discussing the outlines of a Chapter 11 filing with United right away. The carrier's mass tort headache was relieved when Congress established the 9/11 victim compensation fund and capped the liability of the hijacked carriers at the amount of their insurance coverage. United received more help from the federal government when President George W. Bush convened a Presidential Emergency Board in December 2001 to head off a strike by the airline's largest union, International Association of Machinists 141. But the feds couldn't cure United's other woes -- dismal revenue, sky-high labor costs and hostile capital markets. Competitors claim that the company was further burdened by poor management.
With help from New York's Cravath, Swaine & Moore, Sprayregen and his client turned to the Air Transportation Stabilization Board (ATSB). Created by the federal government after 9/11, the ATSB provides loan guarantees to airlines that can demonstrate a "reasonable assurance" of repaying the lender. When the ATSB signaled in fall 2002 that it was disinclined to approve United's $1.8 billion loan guarantee application, Sprayregen and his bankruptcy team shifted to full throttle.
Sprayregen knew that securing DIP financing would be tough. United had a seven-figure daily cash burn rate, and bankers would be wary in general, given the shaky state of the airline industry. According to Sprayregen, a "difficult negotiation" ensued, in which the airline had to agree to tough financial covenants, including strict monthly cash-flow requirements.
With DIP financing on track and bankruptcy papers drafted, Sprayregen and United waited for the final word from the ATSB. On Dec. 4, 2002, the board declared United's business plan untenable and rejected its loan guarantee application. Five days later, Sprayregen filed United's Chapter 11 petition.
Doing high-profile bankruptcies has propelled Sprayregen within the bankruptcy bar. "I would say he's at the top of the pack," says Laura Davis Jones, Wilmington, Del., managing partner of Los Angeles-based bankruptcy boutique Pachulski, Stang, Ziehl, Young & Jones. As if to dispel any doubt, Sprayregen filed a $55 billion Chapter 11 petition for insurance and finance holding company Conseco Inc., just one week after United.
"He's on an incredible run, and he's a hell of a competitor," says Richard Cieri, head of bankruptcy at Cleveland-based Jones, Day, Reavis & Pogue. Whether that determination will be enough to keep United in the air remains to be seen, but it has clearly launched Sprayregen to lofty heights.
"We knew he wouldn't have a big learning curve," says UAL general counsel Francesca Maher. After all, Sprayregen, 43, had already earned his airline bankruptcy wings -- having advised the debtor-in-possession (DIP) lenders in Midway Airlines Corp.'s first Chapter 11 reorganization in 1992 and piloted Trans World Airlines Inc. through its third reorganization in 2001. Maher had also worked with Kirkland & Ellis previously, but it was Sprayregen's drive that sealed the deal. "He had the right blend of aggressiveness, intellect and personality," she says.
Sprayregen started discussing the outlines of a Chapter 11 filing with United right away. The carrier's mass tort headache was relieved when Congress established the 9/11 victim compensation fund and capped the liability of the hijacked carriers at the amount of their insurance coverage. United received more help from the federal government when President George W. Bush convened a Presidential Emergency Board in December 2001 to head off a strike by the airline's largest union, International Association of Machinists 141. But the feds couldn't cure United's other woes -- dismal revenue, sky-high labor costs and hostile capital markets. Competitors claim that the company was further burdened by poor management.
With help from New York's Cravath, Swaine & Moore, Sprayregen and his client turned to the Air Transportation Stabilization Board (ATSB). Created by the federal government after 9/11, the ATSB provides loan guarantees to airlines that can demonstrate a "reasonable assurance" of repaying the lender. When the ATSB signaled in fall 2002 that it was disinclined to approve United's $1.8 billion loan guarantee application, Sprayregen and his bankruptcy team shifted to full throttle.
Sprayregen knew that securing DIP financing would be tough. United had a seven-figure daily cash burn rate, and bankers would be wary in general, given the shaky state of the airline industry. According to Sprayregen, a "difficult negotiation" ensued, in which the airline had to agree to tough financial covenants, including strict monthly cash-flow requirements.
With DIP financing on track and bankruptcy papers drafted, Sprayregen and United waited for the final word from the ATSB. On Dec. 4, 2002, the board declared United's business plan untenable and rejected its loan guarantee application. Five days later, Sprayregen filed United's Chapter 11 petition.
Doing high-profile bankruptcies has propelled Sprayregen within the bankruptcy bar. "I would say he's at the top of the pack," says Laura Davis Jones, Wilmington, Del., managing partner of Los Angeles-based bankruptcy boutique Pachulski, Stang, Ziehl, Young & Jones. As if to dispel any doubt, Sprayregen filed a $55 billion Chapter 11 petition for insurance and finance holding company Conseco Inc., just one week after United.
"He's on an incredible run, and he's a hell of a competitor," says Richard Cieri, head of bankruptcy at Cleveland-based Jones, Day, Reavis & Pogue. Whether that determination will be enough to keep United in the air remains to be seen, but it has clearly launched Sprayregen to lofty heights.
This article is republished with permission from law.com and the February 2003 edition of The American Lawyer. © 2003 NLP IP Company.
