MCI investor
rescues Aloha Air

The $90 million plan
takes the carrier out
of bankruptcy by July

Aloha Airlines, on the brink of financial collapse, announced last night it has reached an agreement in principle with a New York-based private-equity investor on a reorganization plan that will provide up to $90 million to the bankrupt carrier.

Motions filed late yesterday in federal Bankruptcy Court, if approved, would bring the airline out of Chapter 11 reorganization by the end of June, said Miami-based attorney Paul Singerman, special transaction counsel for Aloha.

MatlinPatterson Global Opportunities Partners II LP, one of the largest shareholders in long-distance phone company MCI and a specialist in investing in distressed companies, initially will provide Aloha with a $4 million loan as part of $5 million in interim financing that the airline needs immediately.

"This agreement with MatlinPatterson takes Aloha Airlines to the threshold of exiting bankruptcy in record time," said David Banmiller, Aloha's president and chief executive officer. "Aloha is fortunate to have attracted a significant commitment from such a highly regarded private-equity investment firm."

In yesterday's filing, Aloha said that "without an immediate infusion of additional cash, (it) will be unable to continue operating."

The $4 million loan from MatlinPatterson will carry an 8 percent interest rate and mature on July 1. The motion for the $5 million in interim financing will be heard today in front of Bankruptcy Judge Robert Faris. The remaining $1 million comes from Aloha's collateral account that is being released by credit-card processor First Hawaiian Bank to provide the company with additional working capital.

MatlinPatterson is run by former Credit Suisse First Boston executives David Matlin and Mark Patterson. The firm accumulated its large stake in MCI during the company's bankruptcy by buying MCI's defaulted bonds, which were converted into new notes and equity. Previously, Matlin and Patterson ran the CSFB Global Opportunities fund and averaged 40 percent annual returns by investing in distressed companies, according to Forbes.

Under the Aloha agreement, MatlinPatterson will provide $65 million that will go into the airline in stages before a confirmation hearing that will bring the airline out of bankruptcy. The initial $4 million loan is part of that $65 million. Other potential investors can submit competing proposals for funding reorganization plans for Aloha.

MatlinPatterson also plans to provide the airline with $25 million upon its emergence from bankruptcy and to retain the company's current management. A hearing on the reorganization plan is expected in mid-March.

Singerman said Aloha's fast emergence from bankruptcy will be extraordinary, given that the airline filed for reorganization on Dec. 30.

"In less than two months, the company, its management team, its advisers, in collaboration with its labor groups, key trading partners and key creditor constituencies, have accomplished all that Congress intended in the Bankruptcy Code," Singerman said. "The company has had a respite from the pre-bankruptcy demands of its creditors. It has restructured its aircraft leases. It has reached new agreements with its key labor constituencies. It has attracted a solid, well-regarded, financially capable investor, and it intends to exit bankruptcy in record time. Subject to court approval, the company commits itself to be out of bankruptcy by the end of June 2005, and that is remarkable."

Singerman said that $41 million of the $65 million will be used to pay off the $24 million remaining from Aloha's $45 million loan guaranteed by the federal Air Transportation Stabilization Board, as well as money owed to secured creditors First Hawaiian Bank, Bank of Hawaii, American Savings Bank and City Bank, which is now owned by Central Pacific Financial Corp. The remainder of the $65 million will be used as working capital.

Singerman said unsecured creditors will get the opportunity to negotiate with the airline and with MatlinPatterson for equity participation in the company after bankruptcy. He said it has not been determined how many cents on the dollar those creditors will receive for their claims.

Also, Singerman said the private stock allocation that MatlinPatterson will receive from its debt and cash investment is still subject to negotiation between the airline, MatlinPatterson and the unsecured creditors.

But, Singerman added, "this deal provides for the continued participation of the existing shareholders comprised of representatives of the Ching and Ing families."