Will Northwest’s baggage be overweight?
Delta Air Lines (Delta) had just completed its acquisition of Northwest Airlines (Northwest) and would now start the integration process to become one airline. As part of the acquisition, Delta assumed all debt and covenants of Northwest. Ed Bastien, the Delta-appointed CEO of Northwest realized that the acquisition created a potential violation of debt covenants. The remedy was to pay back the loan if the violation could not be cured. Mr. Bastien was concerned that this would negatively affect the organization as it might require the loan to be classified as current, but he needed his team to investigate this. This critical incident requires students to research accounting guidance as well as understand non-financial debt covenants, and how each plays a role within transactions.
- Evaluate why a non-financial covenant can be just as important as financial covenants
- Evaluate how debt covenant violation affects organization decision making between borrowers and lenders
- Analyze accounting guidance for the treatment of contingencies and debt covenants
- Propose a solution based on financial and non-financial factors