4. An air carrier may not be in bankruptcy or receivership when the application is submitted or when the Board issues the guarantee. However, in one of the most significant changes made at the last moment, this provision was amended to permit a guarantee when "the underlying financial obligation is to be part of a bankruptcy court-certified reorganization plan." Part 1300.11(a)(2).

5. The Act requires that an air carrier must otherwise not have "reasonably available" access to credit. Part 1300.10(a)(1). Proposals to require substantive evidence of such unavailability were not included in the final rule. However, "reasonably available" access to credit is a subjective standard, and it remains to be seen how it will be applied by the Board.

6. The air carrier must agree to permit audits by the General Accounting Office and by an independent auditor acceptable to the Board. These audits would be conducted before issuance of a guarantee, during the term of the guarantee and on the third anniversary of the final payment in full of the loan. Part 1300.11(a)(3) & (4).

7. A guaranteed loan must bear a reasonable rate of interest and reasonable other fees and costs, to be determined by the Board in relation to traditional benchmarks. The Board can reject an application if it finds that the interest rate is unreasonable. Part 1300.15(b). It may also take other fees and costs "into consideration when determining whether to offer a guarantee to a lender." Part 1300.15(c).

8. The Board will assess an annual fee, not a one-time fee, on each air carrier obtaining a guarantee in an amount to be determined. The fee will escalate each year to "reflect the borrower’s potential ability to obtain credit in the private credit markets, in addition to any other factors the Board may deem appropriate." Part 1300.18(d). Whether the Board intends to use this provision to provide an incentive for the early pay down of loans, or as a device to participate in an air carrier’s recovery, or both -- or simply for the traditional purpose of covering administrative expenses -- remains to be seen.

This is one of the major unanswered questions. The direct compensation program was apportioned by available seat miles and revenue ton-miles. The Act does not include any apportionment system for loan guarantees. The only limit in the regulations on the amount of the guarantee for any one air carrier is the "amount that, in the Board’s sole discretion, the air carrier (or its successor) needs in order for it to provide commercial air services." Part 1300.13(b).

The problem, of course, is that most of the guaranteed loans will be for working capital. The need for working capital that cannot be met by conventional financing is not necessarily related to the size of the air carrier. Without apportionment, air carriers quickly could find themselves competing for the available loan guarantees.

Apparently, some thought was given to putting a cap on the maximum amount of the guarantee that any one carrier could receive and to parcel out the guarantees in several tranches, as was done with the direct compensation program. There is no cap in the final regulations. However, they do state that the "Board may limit the amount of a loan guarantee made to initial applicants to ensure that sufficient funds remain available for subsequent applicants." Part 1300.17(d). Additionally, Part 1300.117(b)(4), discussed below, provides criteria for prioritizing applications.

There is obvious friction between requirements that the air carrier demonstrate an ability to repay the loan (e.g., Part 1300.16(b)(8)(iv)) and the requirement that credit not otherwise be available on reasonable terms, i.e., an air carrier has to be in distress severe enough to destroy its credit but not so severe that it cannot fully recover with the guaranteed loan. It is equally obvious that the Board has great discretion in applying these tests.

The Director of OMB was quoted in news reports as saying that "the most important factor will be an airline's ability to succeed in tomorrow's marketplace without passing the bill to the taxpayer." This creates at least the possibility of a contest, with the Board deciding winners and losers. He further was quoted as saying that "an applicant might come forward and not be successful in obtaining a loan . . . but could return with a merger partner and succeed." (New York Times, October 6, 2001, B1.) As discussed below, the regulations seem to anticipate that the Board may be in such a position.

As noted, the common assumption is that most of the loan funds will be used for working capital. But the Board takes a somewhat broader view, at least in theory. A business plan must be provided with each application. "If loan funds are to be used to purchase an existing firm (or the substantial assets of an existing firm), the business plan of the combined entity shall contain a discussion of the way in which any required regulatory or judicial approvals will be obtained, including antitrust approval for any proposed acquisition." Part 1300.16(b)(8)(i). At the very least, the Board does not have an aversion to acting as a broker in a consolidating industry.

1. The air carrier must submit an application on a form to be provided by the Board. Applications will be accepted "after" October 11, 2001 [there is a contradiction between the effective date of the rule, October 11, and the fact that applications will not be effective until "after" that date] and continuing until 5:00 p.m. EDT on June 28, 2002. Only hard copies of the applications (the original and four copies) and accompanying documents will be accepted -- no facsimile or other electronic transmissions. Part 1300.16(a). Applications will be approved or denied in a "timely manner as such applications are received." Part 1300.17(d). This at least implies a first in - first out review process.

2. The application form must be accompanied by all of the loan documentation and numerous certifications from the air carrier and the lender. Part 1300.16(b). Additionally, substantial financial documentation is required to be submitted with the application form, including: the air carrier’s audited consolidated financial statements for the previous five years, as well as interim statements for the current fiscal year; and all financial evaluations and forecasts concerning the air carrier’s operations prepared within the three months prior to September 11, 2001.

3. The air carrier also must provide the business plan on which the loan is based (Part 1300.16(b)(8)). That plan must address a number of key issues, including:

• how the funds will be used, including the possibility of an acquisition of another air carrier discussed above;
• the financing plan, showing that the operational needs of the air carrier will be met during the term of the plan;
• a demonstration that "there is a reasonable assurance that the borrower will be able to repay the loan according to its terms, and a complete description of the operational and financial assumptions on which this demonstration is based;"
• five-year historic and projected financial analyses demonstrating that "the borrower will be able to continue operations if the requested guarantee is approved;"
• a description of all available security for the loan;
• if appropriate, a description of how the Federal government can participate in the air carrier’s equity and thus in the air carrier’s future "financial success" (a provision required by the Act); and
• if appropriate, a description of the air carrier’s plan to restructure its obligations contracts and costs.

4. These requirements apparently are less draconian than originally proposed. They nonetheless assure that the application process will be complex and time consuming. In addition to the provision with respect to possible mergers and acquisitions, the provision asking for restructuring plans reflects at least a tentative view of the industry and its problems. Indeed, in providing such a description, the air carrier "shall jointly develop, with its existing secured and unsecured creditors, employees, or vendors, an agreed-upon plan to restructure the borrower’s obligations, contracts and costs." Part 1300.16(b)(8)(vi). In other words, the Board seems to be saying, here and in the evaluation section discussed below, that while it will not require a workout plan with an application, such a plan is favored.

1. In evaluating applications, the Board will apply the statutory standard -- credit "not reasonably available," a "prudently incurred" loan obligation and a "necessary part of maintaining a safe, efficient, and viable commercial aviation system in the United States." It will use additional evaluation factors, including: a "reasonable assurance" that the air carrier will be able to repay the loan by the due date; and the sufficiency of the security. Part 1300.17(b).

2. In Part 1300.(b)(4), the Board identifies seven other factors, not as prerequisites for grant of an application but to give "greater preference to those applications that meet the greatest number of these criteria." Those factors are:

• the financial soundness of the business plan;
• greater participation in the loan by non-Federal entities;
• grater participation in the loan by private entities, as opposed to public non-Federal entities;
• the government’s ability to participate in upside equity appreciation;
• the concessions by the air carrier’s security holders, other creditors or employees;
• the extent that the guaranteed loan will be used for a purpose other than payment or refinancing of existing debt (such a purpose is disfavored rather than prohibited, if that is a real distinction);
• financial structures that minimize the government’s risk, for example:

• a maturity period of less than seven years;
• pledges of collateral;
• backup guarantees by the air carrier’s parent or other entities;
• a priority for the government in the event of the air carrier’s bankruptcy;
• limitations on the air carrier’s dividends and other distributions;
• limitation on the air carrier’s ability to incur additional debt or capital expenses in excess of those in the business plan;
• reasonable liquidity;
• favorable debt ratios; and
• Commitments to use future private financing to first repay the guaranteed loan.

The regulations raise questions and provide some clues as to how those questions may be resolved, but they do not provide all of the answers.

However, they do strongly suggest that the Board’s role will be more proactive than simply dispensing guarantees. In some respects, and particularly when you consider factors such as employee and creditor concessions that begin to resemble the cram down provisions of the Bankruptcy Code, the Board may envision itself as the arbiter of industry reorganization.

The only certainty at this point is that the Board has left itself with a large number of options.