Lessor, partner interested in buying National

Wednesday, June 27, 2001 | 10:54 a.m.

A new potential buyer emerged for National Airlines on Tuesday, hours before the bankrupt Las Vegas-based airline was to begin shutting down.

International Lease Finance Corp., Los Angeles, one of National's aircraft lessors, came forward with an 11th-hour plan to rescue the two-year-old carrier just as Harrah's Entertainment Inc. was poised to begin diverting cash from credit card ticket sales to begin paying off some $17.4 million in loans.

ILFC, the world's largest aircraft leasing company with 516 commercial jet leases to 110 airlines, began meeting with National's management to hammer out a purchase agreement before a U.S. Bankruptcy Court hearing was even completed Tuesday. ILFC is a division of insurance giant American International Group Inc.

The leasing company, one of seven supplying National's fleet of 16 175-passenger Boeing 757 twin-engine jets, has equity positions in several airlines, including America West, American Trans Air and Alaska Airlines.

ILFC brings with it a "mystery investor" -- described as a "major travel industry entity with significant ties to the Las Vegas market."

Analysts say National would be a good asset for a wholesale travel discount company. That, in essence, was what billionaire financier Carl Icahn was trying to do when he offered to buy National -- pair it with his Lowestfare.com Internet travel company.

ILFC Vice President Michael Platt said in testimony before Judge Linda Riegle that his company plans to have a deal in place by July 26. Citing confidentiality agreements, Platt refused to identify the mystery investor and said it was too early to determine how big a role the investor would have in financing the proposed acquisition of National.

"We expect that ILFC would be a co-investor with the investor, although the allocation of equity between the investor, ILFC and potential other investors has not yet been determined," Platt said in letter to National Chairman Mike Conway dated Tuesday.

National attorney Craig Hansen said ILFC did not come forward with its offer until its management was convinced Icahn was out of the picture for acquiring the airline.

Although Bloomberg News reported Icahn had withdrawn his $181.5 million bid for the airline June 18, court testimony on Tuesday indicated Icahn was still in the picture with counterproposals as late as Friday. When it appeared Icahn was gone for good Friday, ILFC contacted its investor partner and Conway to express an interest.

"ILFC had no desire to become involved in a bidding war with Mr. Icahn," Hansen said.

National, which already secured a new series of concessions from vendors while entertaining an Icahn offer, quickly garnered support from creditors for the new deal with ILFC, but Harrah's objected.

Harrah's, which was blocked from exercising its right to alter National's cash flow late last month by a restraining order issued by Riegle, was in the process of closing out a $16 million letter of credit that serves as a conduit to quickly move funds from credit card companies to National.

Court testimony Tuesday indicated Harrah's had already begun efforts to withdraw the letter of credit and, barring any intervention from the court, National would have had to begin the process of shutting down as early as today.

Harrah's, which already has written off millions of dollars in losses from its investment in National, is frustrated with what it considers to be stall tactics by the airline and wants to get out from under its obligations to the company, which filed for Chapter 11 bankruptcy protection in December.

But under pressure from other creditors and the likelihood that Riegle would rule in favor of National, Harrah's crafted an agreement that sets a series of deadlines and penalties for failure to meet them in an effort to keep deal negotiations on track.

In essence, National would pay Harrah's $10,000 a day for the 35 days between Tuesday and July 31 if a deal isn't signed. In exchange, Harrah's will extend the letter of credit through July 31, extend it again to Aug. 31 if a deal is in the process of being completed and through Oct. 31, by when the deal must be closed.

Harrah's President and Chief Operating Officer Gary Loveman, who spent most of the day in the courtroom observing the proceedings, said National needed the pressure of deadlines to "keep everybody's feet to the fire."

He said Harrah's should not be cast in the role of the villain in the legal drama because the company that owns Harrah's hotel-casino on the Strip and the Rio hotel-casino near the Strip is the only casino operator that has stepped forward with a significant investment in National.

Harrah's holds a 48 percent equity position in the airline, but has lost about $39.4 million through the fourth quarter of 2000 and stands to lose another $16 million if the airline shuts down.

Harrah's officials learned the identity of ILFC's mystery investor during a recess from court proceedings, but also declined to identify the company. Harrah's spokesman Gary Thompson said his company is skeptical that the mystery bidder has the financial resources to acquire National.

Thompson said Harrah's was disappointed National passed up an opportunity when it didn't accept Carl Icahn's $181.5 million bid.

But Conway said the Icahn bid "wouldn't work," primarily because Icahn was counting on more payment concessions from creditors than National had considered.

That's why National spent a good portion of last week contacting some 50 creditors about what concessions they would be willing to make to see a deal signed. Hansen likened the process of convincing creditors to defer payments or take less money to trying to fit "a size 22 foot into a size 12 shoe."

National already pays aircraft lessors about 75 percent of market value for use of the planes. The aircraft lessors agreed to defer July payments while negotiations occur between National and ILFC and its investor.

Conway, who left the courtroom before the hearing was completed to have his first meeting with the mystery investor, said he was more confident than ever that National would complete its reorganization successfully with the new investor in the picture. He, too, declined to identify the company, but said it "was a household name" and capable of financing a buyout.

Besides scores of attorneys packing the courtroom, several curious National employees attended Tuesday's hearing. A cross-section of the company's 1,400 workers -- pilots, flight attendants, ramp personnel as well as middle-management executives -- were present.

Also present were some of National's suppliers, including a vendor from the Great American Cooking Co., which makes about 6,000 cookies a day for National flight attendants to pass out on flights. Mike Levine of Great American said he attended the hearing because National is his largest customer and he wanted to get a first-hand look at the process.