Investors challenge Delta’s crisis loan offer to Pinnacle

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Two investors want a bankruptcy judge to reject a request by Pinnacle Airlines to obtain a $74 million emergency loan from Delta Air Lines, arguing the terms unfairly benefit Delta at the expense of other creditors.

Nantahala Capital Partners and Ryan J. Morris filed separate objections to a motion by Pinnacle on 2 April for the judge to approve the financing terms.

Pinnacle has stated that obtaining the debtor-in-possession loan from Delta is necessary for the airline to remain solvent.

But Nantahala's analysts and Morris claim that the loan's terms reveal a different picture. According to their objections, Delta may have caused Pinnacle's liquidity crisis by withholding payments worth up to $37 million to Pinnacle, then forcing the regional carrier to accept a loan with terms favourable only to Delta.

Pinnacle had previously told investors they expected two major payments from Delta related to the 2010 sale of Mesaba Airlines, which Pinnacle acquired from Delta.

Somehow, more than $100 million in cash and other assets disclosed by Pinnacle in November 2011 had evaporated by the time the carrier field for bankruptcy on 1 April. The two investors believe that Delta withheld the payment.

Morris and Nantahala are also suspicious about Pinnacle's proposals to wind down turboprop flying for United Airlines, which includes giving back 28 Bombardier Q400s to the Economic Development Canada bank.

Some analysts had interpreted Pinnacle's move as part of a wider trend. Both Pinnacle Airlines and Republic Airways had attempted to diversify their businesses in the latter half of the last decade, with Pinnacle acquiring Colgan Air to add United as a client and Republic buying Frontier Airlines.

But Morris and Nantahala believe that Pinnacle's move is misguided. They each quote a Pinnacle executive claiming in the first quarter of 2011 that his airline owned a $3 million equity stake in each Q400 in the Colgan fleet.

"The economic justification for Pinnacle's walking away from these aircraft in which it recently invested $84 million is unclear," according to Nantahala's brief.