PBGC Wants Northwest to Come Clean on Reorganization Plan

March 23, 2007 (PLANSPONSOR.com) - The nation's private pension insurer has a message for potential investors in Northwest Airlines - know what you're getting into.

Earlier today the Pension Benefit Guaranty Corporation (PBGC) said that Northwest hasn’t been clear about the implications of its pension liabilities in the Chapter 11 disclosure statement it plans to send to creditors.   In a court filing last week, the PBGC is asking that Northwest Airlines make it clear to creditors that the airline will remain stuck with “billions of dollars” in pension liabilities if it exits bankruptcy proceedings under its current Chapter 11 plan.

“The disclosure statement should clearly state what is now, at best, implied and buried between the lines,” the PBGC said, according to an Associated Press report. The implication, it said, is that the pension plans have not been terminated — and will not be — under Northwest’s bankruptcy proceedings. Accordingly, the pension liability will “continue unaffected.”

In the court papers, which were filed Friday, the PBGC said the disclosure is “critically important” to Northwest’s unsecured creditors because they would end up owning more than 90% of the stock Northwest aims to issue upon its Chapter 11 exit.   The current reorganization plan for Northwest calls for creditors to swap their debt for the new stock.

The PBGC said Northwest and its subsidiaries “do not propose to terminate any of the pension plans.” But that intention should be stated explicitly in the company’s reorganization plan so that creditors can take the liability into account when they decide whether to swap debt for new stock in the company.   “In order for them to have adequate information from which to decide whether to exchange their debt claims for equity, they need to understand that, following confirmation of the plan of reorganization, (Northwest) will remain fully liable for all funding, premiums, unfunded pension-benefit liabilities upon termination, and other potential liabilities,” the PBGC said, according to an AP report.

Northwest's disclosure statement has also drawn fire from a group of big distressed-debt investors who collectively hold $1.5 billion in unsecured claims against the airline. In court papers Friday, the investors said Northwest is seeking to impose on its new stockholders "numerous onerous provisions that will likely adversely affect the market value and marketability of the new common stock."

Judge Allan Gropper of the U.S. Bankruptcy Court in Manhattan is scheduled to consider the adequacy of that statement at a court hearing Monday.

In filings this year, Northwest said it would owe the PBGC $4.2 billion if it terminated its three pension plans.   In January the airline and the PBGC hammered out a deal to settle overdue insurance premiums the airline owed to cover its pilots' pension plan.   However, the $14 million settlement did not relieve Northwest of the burden of its underfunded pension plans, which amounted to a shortfall of $5.7 billion when the company filed for bankruptcy protection in September 2005 (see  Northwest Settles Overdue Premiums with the PBGC ).