Delta requests approval of $300 million letter-of-credit agreement for credit card processing reserve

By Caroline Salls

Pittsburgh, Oct. 14 - Delta Air Lines, Inc. requested approval of a $300 million letter-of-credit facility agreement with Merrill Lynch Commercial Finance Corp. to potentially account for a portion of the reserve under its credit card processing agreement with U.S. Bank, according to a Thursday filing with the U.S. Bankruptcy Court for the Southern District of New York.

Under the U.S. Bank agreement, the bank provides credit card processing services to Delta, thereby enabling its customers to use Visa and MasterCard credit cards to purchase goods and services from Delta.

The agreement allows U.S. Bank to withhold amounts that it would otherwise pay to Delta in order to create a reserve to secure the exposure U.S. Bank would have to Visa and MasterCard customers if Delta failed to perform its obligations to those customers.

According to the motion, Delta has not decided whether it will proceed with the proposed letter-of-credit facility. However, Delta said it is requesting approval of the letter-of-credit agreement so it can proceed quickly if it does choose to use the facility.

The order would authorize Delta to enter into the fee letter and engagement letter under the facility and would allow Merrill Lynch to begin structuring the facility and attempting to arrange a syndicate.

The company said it is also considering providing credit support to U.S. Bank through an insurance product.

Under the agreement, the reserve must be equal at all times to 100% of U.S. Bank's potential liability for tickets purchased by Delta customers using Visa or MasterCard credit cards, plus the amount of other obligations owed by Delta to U.S. Bank.

During the term of the U.S. Bank agreement, the exposure range is expected to be from $425 million to $825 million, of which Delta can substitute a standby letter-of-credit or other credit protection for the lesser of $300 million or 45% of the exposure.

The credit support provided by the facility would allow Delta to use up to $300 million of cash representing credit card purchases that would otherwise be held by the bank as part of the reserve.

Delta, an Atlanta-based airline, filed for bankruptcy on Sept. 14. Its Chapter 11 case number is 05-17923.

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