The federal Pension Guaranty Benefit Corporation, the quasi-governmental pension insurer, challenged the key portion of United Airline’s new debtor-in-possession financing arrangement in United’s Bankruptcy Court on Friday by asserting that the agreement violates federal-pension law by forbidding the company from contributing to its underfunded retirement plans. Earlier posts on United’s chapter 11 case can be reviewed here.
The PBGC, which is a member of United’s creditors’ committee, appears to have a clear conflict of interest now with most other unsecured creditors of United, who face receiving a greatly reduced dividend — or nothing at all — on their unsecured claims if United has to meet its underfunded pension obligations.
The PBGC alleges that if United terminates the pension plans — which would require the permission of the Bankruptcy Court and the PBGC — it would be on the hook for $6.4 billion. In the event of a termination, the benefits that UAL’s 120,000 workers and retirees would lose would amount to around $2 billion because they exceed the guarantee limits set by Congress.
United also asked the bankruptcy judge on Friday to extend to the end of the year the company’s exclusive right to file a plan of reorganization, meaning it wouldn’t have to compete with other plans filed with the Court by creditors. United’s exclusive right currently expires on Aug. 30.

Following on prior posts here and here, the NY Times’ Gretchen Morgenson examines the latest carnage at Hewlett-Packard, Inc over the continued inability of the company to generate any economic benefit from spending almost $20 billion in buying Compaq almost three years ago.
I wonder whether Professor Bainbridge will set up a pool on when H-P CEO Carly Fiorina will resign or be fired?

Commenting on the flap over the Google owners’ Playboy interview that may delay the Google IPO that has already been postponed once, Professor Ribstein makes this common sense observation:

Can the Google boys be trusted with investors’ money if they think it’s more important to talk to Playboy than to protect their multi-billion-dollar public offering from regulators?

Continued lackluster corporate spending on technology is seperating the strong from the weak quickly in the high-tech industry.
That was certainly apparent yesterday as Dell Inc. and International Business Machines Corp. detailed continued growth and new hiring, while Hewlett-Packard Co. stumbled badly and fired three top executives.
The gloomy outlook has dashed hope among tech executives and investors that the sector will soon return to the supercharged growth of the late 1990s. Pummeled again yesterday, the tech-heavy Nasdaq Composite Index is down 12.5% for the year, and 19% from its peak in late January.
Curiously, demand for high-tech goods remains good. World-wide shipments of personal computers rose 15.5% in the second quarter, and Commerce Department reports indicate that U.S. companies’ spending on hardware and software increased 15% in the second quarter from a year ago.
H-P’s troubles were rooted in its unit that makes computer servers and storage devices for corporate customers, which suffered from a botched software installation and aggressive discounting. The unit posted an operating loss of $208 million on revenue of $3.4 billion, contributing to a surprising earnings shortfall.
Chief Executive Carly Fiorina called the blunders “unacceptable” and promised that the unit would return to profitability in the current quarter. In a terse memo issued a few hours after the disappointing results, Ms. Fiorina announced the departures of three executives, including Peter Blackmore, head of the H-P’s business sales division, who used to work for Houston-based Compaq before its merger with H-P.
Of course, now almost two and a half years after the questionable H-P – Compaq merger that Ms. Fiorina heavily promoted, could it also be said that that “blunder” is “unacceptable” and that Ms. Fiorina should be shown the door? Stay tuned on that one.
H-P is increasingly caught in a squeeze between Dell’s low prices for basic corporate computers and IBM’s increasingly innovative high-performance computers. Both rivals have been gaining market share against H-P since its acquisition of Compaq in 2002. As a result, H-P has been shifting toward lower-profit businesses. H-P’s personal-computer unit, which has relatively low gross margins is growing faster than its servers and storage business, which typically has much higher gross margins.
My sense is that this is not going to end well for Ms. Fiorina.

The Airline Pilots’ Association‘s investment bankers at US Airways Group Inc. warned yesterday that the carrier could fail in the near future and is highly likely to file for chapter 11 bankruptcy protection by mid-September without substantial cost cuts.
Such a bankruptcy filing would be known as a “chapter 22” because US Air is already operating under a structure adopted under a reorganization plan approved in a previous chapter 11 case in 2002-03.
Arlington, Va.-based US Airways said it concurs with the report’s conclusion that it is in the best interest of the company and its labor unions to reach consensual agreements quickly that will reduce expenses and help it implement its turnaround plan.
Although US Air is not far from its previous chapter 11 reorganization, the company has not been profitable because the domestic flight market is now controlled by discount airlines that have low costs and low fares. Add to that the recent spike in fuel prices and, before you know it, US Air posted a net loss of $143 million during the first part of its fiscal year.
Frankly, I do not understand how US Air can avoid going into the tank even with union concessions. It has a $130 million pension-plan contribution due on Sept. 15 that will consume liquidity if it is made. Its regional-jet financing arrangements with two manufacturers and General Electric Co. mature on Sept. 30 in the absence of a turnaround, and it is on the verge of defaulting on Sept. 30 on the terms of a federally guaranteed loan that provided the company with a portion of its exit financing out of Chapter 11 in 2003.
As Professor Ribstein has insightfully noted on several occasions, the market needs to be allowed to put at least one of these financially-strapped airlines out of its misery.

Houston-based National Oilwell Inc. announced plans to acquire Houston-based Varco International Inc. in a stock deal valued at about $2.22 billion. The deal will combine two companies that provide products and services for oil and natural gas drilling.
Terms of the agreement call for Varco stockholders to receive 0.8363 of a National Oilwell share for each Varco share. Based on National Oilwell’s Wednesday closing price of $30.85 on the New York Stock Exchange, the transaction values each Varco share at $25.80, a 9.2% premium to Varco’s Wednesday closing price of $23.62.
National Oilwell President and Chief Executive Pete Miller will serve in the same capacity of the combined company. John Lauletta, Varco’s chairman and CEO, will serve as chairman of the combined company. Varco’s president and chief operating officer, Joe Winkler, will serve as the operating chief. Each company will be equally represented on the board and, after closing of the deal, National Oilwell will change its name to National Oilwell Varco Inc.
National Oilwell expects that the transaction will add to earnings and cash flow per share in 2005. National Oilwell expects about $40 million to $50 million in pretax cost cuts as a result of production facility consolidation, expense reductions in sales and marketing and corporate overhead cuts that should be achieved by the end of 2005.

Labor relations at UAL Corp.’s United Airlines hit a new low yesterday as United’s the International Association of Machinists union asked the bankruptcy judge overseeing the carrier’s chapter 11 case to appoint a trustee to operate the company.
Still fuming over over United’s recent decision not to make required contributions to its underfunded pension plans, the machinists contended in their trustee motion that United has shown “misconduct, … dishonesty and incompetence” by breaching fiduciary duties related to the plans, favoring some classes of creditors over others and failing to produce a workable business plan for a reorganization.
Frankly, the machinists’ motion has about as much of a chance of succeeding on their motion as I have of winning the “Most Handsome Cowboy” contest at the Bluebonnet Dance Palace this Saturday night. United’s decision not to make the pension payments was prudent and made to attract new capital to the company that would fund a reorganization plan that would avert a liquidation of United. The machinists have not accepted the reality that a United liquidation would be even worse for them than a reorganized United that terminates its pension plans but continues to provide jobs for the union’s members.
Although it is unlikely that the bankruptcy court will grant the union’s motion, the discord between the union and United management could affect United’s improved operational performance of the past two years, which would cause further delays in generating the private capital necessary to fund a plan for United to emerge from chapter 11.
From my vantage point, the unions lack of a coherent strategy in the United reorganization is appalling.

Houston-based El Paso Corp. announced today that an internal review of its accounting has prompted the company to restate quarterly earnings from 1999 to 2003. El Paso noted in its announcement that stockholders’ equity would be reduced by the move, but that “cash flow” would not be affected. As if this latter assurance is going to make creditors any more willing to provide credit to El Paso!
It has not been a good year for El Paso, which has been the subject of an overstatement of reserves scandal and multiple resulting investigations. Here are the previous posts on El Paso’s troubles.
The restatement will result in increases and decreases in El Paso’s quarterly earnings at its merchant energy and production units, and that earnings at the parent company level will also be restated. El Paso also noted that it had received waivers under its $3 billion revolving-credit facility giving it a Sept. 30 deadline to file its 2003 10-K, which the company believes it will be able to meet. An El Paso spokesperson contended that the restatements would not cause the company to default on any debt covenants.
The bankruptcy watch for El Paso continues, and there is nothing in this latest announcement that indicates that such a result is any less likely.