e424b3
The
information in this preliminary prospectus is not complete and
may be changed. We may not deliver these securities until a
prospectus supplement is delivered in final form. This
preliminary prospectus supplement and the accompanying
prospectus are not an offer to sell these securities and we are
not soliciting offers to buy these securities in any state where
the offer or sale is not permitted.
|
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-126738
SUBJECT TO COMPLETION, DATED
SEPTEMBER 19, 2007
PRELIMINARY PROSPECTUS SUPPLEMENT TO PROSPECTUS, DATED
SEPTEMBER 26, 2005
$500,000,000
2007-1
PASS THROUGH TRUSTS
PASS THROUGH CERTIFICATES,
SERIES 2007-1
Two classes of the Southwest Airlines Co. Pass Through
Certificates,
Series 2007-1,
are being offered under this prospectus supplement: Class A
and Class B. A separate trust will be established for each
class of certificates. The trusts will use the proceeds from the
sale of the certificates to acquire equipment notes. The
equipment notes will be issued by Southwest on a full recourse
basis. Payments on the equipment notes held in each trust will
be passed through to the holders of certificates of such
trust.
The equipment notes will be issued for each of 16 Boeing
737-700
aircraft owned by Southwest. The equipment notes issued for each
aircraft will be secured by a mortgage on such aircraft.
Interest on the equipment notes held for the Class A and
Class B certificates will be payable semiannually on each
February 1 and August 1 after issuance, beginning on
February 1, 2008. Principal payments on the equipment notes
held for the Class A and Class B certificates will be
scheduled on February 1 and August 1 in certain years, beginning
on February 1, 2008.
The Class A certificates will rank senior to the
Class B certificates.
BNP Paribas, acting through its New York branch, will
provide a liquidity facility for the Class A certificates
in an amount sufficient to make three consecutive semiannual
interest payments. The Class B certificates will not have
the benefit of a liquidity facility.
The certificates will not be listed on any national
securities exchange.
Investing in the certificates involves risks. See
Risk Factors on page S-11.
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Principal
|
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Interest
|
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Final Expected
|
|
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Price to
|
|
Pass Through Certificates
|
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Amount
|
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Rate
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|
Distribution Date
|
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Public(1)
|
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Class A
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$
|
412,100,000
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%
|
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August 1, 2022
|
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100
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%
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Class B
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87,900,000
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August 1, 2022
|
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100
|
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(1) |
|
Plus accrued interest, if any,
from the date of issuance. |
The underwriters will purchase all of the certificates if any
are purchased. The aggregate proceeds from the sale of the
certificates will be $500,000,000. Southwest will pay the
underwriters a commission of $ .
Delivery of the certificates in book-entry form only will be
made on or about October , 2007.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus supplement or the
accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
Joint Bookrunners and Joint
Structuring Agents
September , 2007
PRESENTATION
OF INFORMATION
These offering materials consist of two documents: (a) this
Prospectus Supplement, which describes the terms of the
certificates that we are currently offering, and (b) the
accompanying Prospectus, which provides general information
about our pass through certificates, some of which may not apply
to the certificates that we are currently offering. The
information in this Prospectus Supplement replaces any
inconsistent information included in the accompanying
Prospectus.
We have given certain capitalized terms specific meanings for
purposes of this Prospectus Supplement. The Index of
Terms attached as Appendix I to this Prospectus
Supplement lists the page in this Prospectus Supplement on which
we have defined each such term.
At various places in this Prospectus Supplement and the
Prospectus, we refer you to other sections of such documents for
additional information by indicating the caption heading of such
other sections. The page on which each principal caption
included in this Prospectus Supplement and the Prospectus can be
found is listed in the Table of Contents below. All such cross
references in this Prospectus Supplement are to captions
contained in this Prospectus Supplement and not in the
Prospectus, unless otherwise stated.
This Prospectus Supplement and the accompanying Prospectus and
the documents incorporated by reference include
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements are based on, and include
statements about, the Companys current intent,
expectations, beliefs, estimates, projections, strategies and
performance. Specific forward-looking statements can be
identified by the fact that they do not strictly relate to
historical or current facts and include, without limitation,
words such as expects, plans,
anticipates, believes,
intends, may, will,
goal and similar expressions and variation thereof.
These statements involve risk, uncertainties, assumptions and
other factors that are difficult to predict and that could cause
actual results to vary materially from those expressed or
indicated by them. These factors include, but are not limited
to, the factors discussed in this Prospectus Supplement under
the heading Risk Factors and those contained in our
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006 under the
heading Risk Factors. All forward-looking statements
are based upon information available to us on the date such
statements are made. We undertake no obligation to publicly
update or revise any forward-looking statement after the date of
this Prospectus Supplement, whether as a result of new
information, future events or otherwise.
TABLE OF
CONTENTS
Prospectus
Supplement
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Page
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S-1
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S-1
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S-2
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S-3
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S-5
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S-6
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S-11
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S-11
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S-11
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S-13
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S-16
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S-17
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S-17
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S-18
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S-19
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S-19
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S-19
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S-21
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S-23
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S-23
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S-25
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S-25
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S-26
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S-26
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S-28
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S-29
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S-29
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S-32
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S-32
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S-32
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S-34
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S-36
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S-36
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S-37
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S-37
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S-40
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S-41
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S-43
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S-44
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S-44
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S-44
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S-45
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S-45
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S-45
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S-47
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S-47
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S-47
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S-47
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S-48
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S-49
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S-50
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S-50
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S-51
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S-52
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S-52
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S-52
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S-56
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S-56
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S-56
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S-56
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S-i
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Page
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S-57
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S-57
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S-57
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S-57
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S-59
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S-59
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S-59
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S-60
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S-61
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S-62
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S-64
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S-66
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S-66
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S-66
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S-66
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S-66
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S-66
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S-67
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S-67
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S-67
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Appendix I
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Appendix II
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Appendix III
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S-ii
Prospectus
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i
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ii
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1
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1
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3
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4
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5
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18
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22
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25
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25
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26
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26
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27
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You should rely only on the information contained in this
document or to which we have referred you. We have not
authorized anyone to provide you with information that is
different. This document may be used only where it is legal to
sell these securities. The information in this document may be
accurate only on the date of this document.
S-iii
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights selected information from this
Prospectus Supplement and the accompanying Prospectus and may
not contain all of the information that is important to you. For
more complete information about the Certificates and Southwest
Airlines Co., you should read this entire Prospectus Supplement
and the accompanying Prospectus, as well as the materials filed
with the Securities and Exchange Commission (the
Commission) that are considered to be part of this
Prospectus Supplement and the Prospectus. See
Incorporation of Certain Documents by Reference in
this Prospectus Supplement. In this Prospectus Supplement,
references to Southwest, the Company,
we, us and our mean
Southwest Airlines Co.
Summary of Terms of Certificates
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Class A
|
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Class B
|
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Certificates
|
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Certificates
|
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Aggregate Face Amount
|
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$412,100,000
|
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|
|
$87,900,000
|
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Interest Rate
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%
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%
|
|
Ratings:
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Moodys
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Aa3
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Baa1
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Standard & Poors
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AA−
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A
|
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Initial Loan to Aircraft Value
(cumulative)(1)
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65.0%
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78.9%
|
|
Highest Loan to Aircraft Value
(cumulative)(2)
|
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65.0%
|
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|
78.9%
|
|
Expected Principal Distribution
Window (in years)
|
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0.3-14.8
|
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0.3-14.8
|
|
Initial Average Life (in years
from Issuance Date)
|
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9.8
|
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|
9.8
|
|
Regular Distribution Dates
|
|
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February 1 and August 1
|
|
|
|
February 1 and August 1
|
|
Final Expected Distribution Date
|
|
|
August 1, 2022
|
|
|
|
August 1, 2022
|
|
Final Maturity Date
|
|
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February 1, 2024
|
|
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|
August 1, 2022
|
|
Minimum Denomination
|
|
|
$1,000
|
|
|
|
$1,000
|
|
Section 1110 Protection
|
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Yes
|
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|
Yes
|
|
Liquidity Facility Coverage
|
|
|
3 semiannual interest payments
|
|
|
|
None
|
|
|
|
|
(1)
|
|
In calculating the initial loan to
Aircraft value ratios, we assumed an aggregate appraised
Aircraft value of $634,000,000. The aggregate appraised value is
only an estimate and reflects assumptions that are described in
Description of the Aircraft and the AppraisalsThe
Appraisals.
|
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(2)
|
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See Loan to Aircraft
Value Ratios.
|
S-1
Equipment Notes and the Aircraft
The Class A and Class B Trusts will hold Series A
and Series B Equipment Notes, respectively, in each case
issued by Southwest for each of 16 Aircraft owned by Southwest.
The Equipment Notes issued with respect to each Aircraft will be
secured by a mortgage on such Aircraft. Set forth below is
certain information about the Equipment Notes expected to be
held in the Trusts and the Aircraft expected to secure such
Equipment Notes:
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Initial
|
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|
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Principal
|
|
|
|
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Aircraft
|
|
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|
|
|
Amount of
|
|
|
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Registration
|
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Manufacturers
|
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Delivery
|
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Appraised
|
|
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Equipment
|
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Aircraft Type
|
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Number
|
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Serial Number
|
|
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Date
|
|
|
Base Value(1)
|
|
|
Notes
|
|
|
Boeing
737-700
|
|
|
N259WN
|
|
|
|
35554
|
|
|
|
11/1/2006
|
|
|
$
|
38,580,000
|
|
|
$
|
30,425,868
|
|
Boeing
737-700
|
|
|
N260WN
|
|
|
|
32518
|
|
|
|
11/22/2006
|
|
|
|
38,610,000
|
|
|
|
30,449,527
|
|
Boeing
737-700
|
|
|
N261WN
|
|
|
|
32517
|
|
|
|
12/14/2006
|
|
|
|
38,900,000
|
|
|
|
30,678,233
|
|
Boeing
737-700
|
|
|
N262WN
|
|
|
|
32519
|
|
|
|
12/21/2006
|
|
|
|
38,920,000
|
|
|
|
30,694,006
|
|
Boeing
737-700
|
|
|
N263WN
|
|
|
|
32520
|
|
|
|
1/17/2007
|
|
|
|
39,220,000
|
|
|
|
30,930,599
|
|
Boeing
737-700
|
|
|
N264LV
|
|
|
|
32521
|
|
|
|
1/24/2007
|
|
|
|
39,230,000
|
|
|
|
30,938,486
|
|
Boeing
737-700
|
|
|
N265WN
|
|
|
|
32522
|
|
|
|
2/6/2007
|
|
|
|
39,510,000
|
|
|
|
31,159,306
|
|
Boeing
737-700
|
|
|
N267WN
|
|
|
|
32525
|
|
|
|
2/26/2007
|
|
|
|
39,600,000
|
|
|
|
31,230,284
|
|
Boeing
737-700
|
|
|
N268WN
|
|
|
|
32524
|
|
|
|
3/5/2007
|
|
|
|
39,810,000
|
|
|
|
31,395,899
|
|
Boeing
737-700
|
|
|
N269WN
|
|
|
|
32526
|
|
|
|
3/13/2007
|
|
|
|
39,820,000
|
|
|
|
31,403,785
|
|
Boeing
737-700
|
|
|
N272WN
|
|
|
|
32527
|
|
|
|
3/29/2007
|
|
|
|
39,850,000
|
|
|
|
31,427,445
|
|
Boeing
737-700
|
|
|
N274WN
|
|
|
|
32529
|
|
|
|
4/23/2007
|
|
|
|
40,150,000
|
|
|
|
31,664,038
|
|
Boeing
737-700
|
|
|
N275WN
|
|
|
|
36153
|
|
|
|
5/3/2007
|
|
|
|
40,420,000
|
|
|
|
31,876,972
|
|
Boeing
737-700
|
|
|
N276WN
|
|
|
|
32530
|
|
|
|
5/14/2007
|
|
|
|
40,450,000
|
|
|
|
31,900,631
|
|
Boeing
737-700
|
|
|
N277WN
|
|
|
|
32531
|
|
|
|
5/24/2007
|
|
|
|
40,460,000
|
|
|
|
31,908,517
|
|
Boeing
737-700
|
|
|
N278WN
|
|
|
|
36441
|
|
|
|
5/31/2007
|
|
|
|
40,470,000
|
|
|
|
31,916,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
634,000,000
|
|
|
$
|
500,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The appraised base value of each
Aircraft set forth above is the lesser of the average and median
values of such Aircraft as appraised by each of Aircraft
Information Services, Inc. (AISI), BACK Aviation
Solutions (BACK) and BK Associates, Inc.
(BK) (collectively the Appraisers), as
of June 25, 2007, July 16, 2007 and July 16, 2007,
respectively. These appraisals are based upon varying
assumptions and methodologies. An appraisal is only an estimate
of value and should not be relied upon as a measure of
realizable value. See Risk FactorsRisk Factors
Relating to the Certificates and the OfferingThe
appraisals are only estimates of Aircraft value.
|
S-2
Loan to Aircraft Value Ratios
The following table sets forth loan to Aircraft value ratios
(LTVs) for each Class of Certificates as of the
Issuance Date and each Regular Distribution Date thereafter. The
table should not be considered a forecast or prediction of
expected or likely LTVs but simply a mathematical calculation
based on one set of assumptions. See Risk
FactorsRisk Factors Relating to the Certificates and the
OfferingThe appraisals are only estimates of Aircraft
value.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
Outstanding Balance(2)
|
|
|
LTV Ratios(3)
|
|
|
|
Aircraft
|
|
|
Class A
|
|
|
Class B
|
|
|
Class A
|
|
|
Class B
|
|
Date
|
|
Value(1)
|
|
|
Certificates
|
|
|
Certificates
|
|
|
Certificates
|
|
|
Certificates
|
|
|
At Issuance
|
|
$
|
634,000,000
|
|
|
$
|
412,100,000
|
|
|
$
|
87,900,000
|
|
|
|
65.0
|
%
|
|
|
78.9
|
%
|
February 1, 2008
|
|
|
624,345,178
|
|
|
|
404,961,292
|
|
|
|
86,377,330
|
|
|
|
64.9
|
|
|
|
78.7
|
|
August 1, 2008
|
|
|
614,690,355
|
|
|
|
398,394,352
|
|
|
|
84,976,616
|
|
|
|
64.8
|
|
|
|
78.6
|
|
February 1, 2009
|
|
|
605,035,533
|
|
|
|
391,827,412
|
|
|
|
83,575,903
|
|
|
|
64.8
|
|
|
|
78.6
|
|
August 1, 2009
|
|
|
595,380,711
|
|
|
|
385,260,472
|
|
|
|
82,175,189
|
|
|
|
64.7
|
|
|
|
78.5
|
|
February 1, 2010
|
|
|
585,725,888
|
|
|
|
372,836,273
|
|
|
|
80,774,476
|
|
|
|
63.7
|
|
|
|
77.4
|
|
August 1, 2010
|
|
|
576,071,066
|
|
|
|
364,683,658
|
|
|
|
79,373,762
|
|
|
|
63.3
|
|
|
|
77.1
|
|
February 1, 2011
|
|
|
566,416,244
|
|
|
|
356,598,316
|
|
|
|
77,973,049
|
|
|
|
63.0
|
|
|
|
76.7
|
|
August 1, 2011
|
|
|
556,761,421
|
|
|
|
348,580,245
|
|
|
|
76,572,335
|
|
|
|
62.6
|
|
|
|
76.4
|
|
February 1, 2012
|
|
|
547,106,599
|
|
|
|
340,629,448
|
|
|
|
75,171,622
|
|
|
|
62.3
|
|
|
|
76.0
|
|
August 1, 2012
|
|
|
537,451,777
|
|
|
|
332,745,922
|
|
|
|
73,770,909
|
|
|
|
61.9
|
|
|
|
75.6
|
|
February 1, 2013
|
|
|
527,796,954
|
|
|
|
324,929,670
|
|
|
|
72,370,195
|
|
|
|
61.6
|
|
|
|
75.3
|
|
August 1, 2013
|
|
|
518,142,132
|
|
|
|
317,180,689
|
|
|
|
65,468,100
|
|
|
|
61.2
|
|
|
|
73.9
|
|
February 1, 2014
|
|
|
508,487,310
|
|
|
|
309,810,759
|
|
|
|
64,175,967
|
|
|
|
60.9
|
|
|
|
73.5
|
|
August 1, 2014
|
|
|
498,832,487
|
|
|
|
302,496,261
|
|
|
|
62,883,833
|
|
|
|
60.6
|
|
|
|
73.2
|
|
February 1, 2015
|
|
|
489,177,665
|
|
|
|
295,237,195
|
|
|
|
61,591,700
|
|
|
|
60.4
|
|
|
|
72.9
|
|
August 1, 2015
|
|
|
479,522,843
|
|
|
|
288,033,563
|
|
|
|
60,299,566
|
|
|
|
60.1
|
|
|
|
72.6
|
|
February 1, 2016
|
|
|
469,868,020
|
|
|
|
280,885,364
|
|
|
|
59,007,432
|
|
|
|
59.8
|
|
|
|
72.3
|
|
August 1, 2016
|
|
|
460,213,198
|
|
|
|
273,792,597
|
|
|
|
57,715,299
|
|
|
|
59.5
|
|
|
|
72.0
|
|
February 1, 2017
|
|
|
450,558,376
|
|
|
|
262,411,496
|
|
|
|
55,504,386
|
|
|
|
58.2
|
|
|
|
70.6
|
|
August 1, 2017
|
|
|
440,903,553
|
|
|
|
247,450,430
|
|
|
|
52,515,768
|
|
|
|
56.1
|
|
|
|
68.0
|
|
February 1, 2018
|
|
|
431,248,731
|
|
|
|
229,888,880
|
|
|
|
48,950,429
|
|
|
|
53.3
|
|
|
|
64.7
|
|
August 1, 2018
|
|
|
421,593,909
|
|
|
|
210,211,002
|
|
|
|
44,906,472
|
|
|
|
49.9
|
|
|
|
60.5
|
|
February 1, 2019
|
|
|
411,939,086
|
|
|
|
188,716,776
|
|
|
|
40,239,095
|
|
|
|
45.8
|
|
|
|
55.6
|
|
August 1, 2019
|
|
|
402,284,264
|
|
|
|
165,614,331
|
|
|
|
35,243,770
|
|
|
|
41.2
|
|
|
|
49.9
|
|
February 1, 2020
|
|
|
392,629,442
|
|
|
|
141,058,399
|
|
|
|
29,956,412
|
|
|
|
35.9
|
|
|
|
43.6
|
|
August 1, 2020
|
|
|
382,974,619
|
|
|
|
115,169,528
|
|
|
|
24,405,703
|
|
|
|
30.1
|
|
|
|
36.4
|
|
February 1, 2021
|
|
|
373,319,797
|
|
|
|
88,044,881
|
|
|
|
18,441,481
|
|
|
|
23.6
|
|
|
|
28.5
|
|
August 1, 2021
|
|
|
363,664,975
|
|
|
|
59,764,810
|
|
|
|
12,363,655
|
|
|
|
16.4
|
|
|
|
19.8
|
|
February 1, 2022
|
|
|
354,010,152
|
|
|
|
30,397,126
|
|
|
|
2,831,335
|
|
|
|
8.6
|
|
|
|
9.4
|
|
August 1, 2022
|
|
|
341,137,056
|
|
|
|
0
|
|
|
|
0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
[Footnotes on next
page.]
S-3
|
|
|
(1)
|
|
We have assumed that the initial
appraised value of each Aircraft, determined as described under
Equipment Notes and the Aircraft, declines by
approximately 3% of the initial appraised base value each year
for the first 15 years after the year of delivery of the
Aircraft by the manufacturer and by approximately 4% each year
after that. Other rates or methods of depreciation may result in
materially different LTVs. We cannot assure you that the
depreciation rates and method used for purposes of the table
will occur nor can we predict the actual future value of any
Aircraft. See Risk FactorsRisk Factors Relating to
the Certificates and the OfferingThe appraisals are only
estimates of Aircraft value.
|
|
|
(2)
|
|
Outstanding balances as of each
Regular Distribution Date are shown after giving effect to
distributions expected to be made on such distribution date.
|
|
|
(3)
|
|
The LTVs for each Class of
Certificates were obtained for each Regular Distribution Date by
dividing (i) the expected outstanding balance of such Class
together, in the case of the Class B Certificates, with the
expected outstanding balance of the Class A Certificates
after giving effect to the distributions expected to be made on
such distribution date, by (ii) the assumed value of all of
the Aircraft on such date based on the assumptions described
above.
|
S-4
Set forth below is a diagram illustrating the structure for the
Offering of the Certificates and certain cash flows.
|
|
|
(1)
|
|
Each Aircraft will be subject to a
separate Indenture with a separate Loan Trustee.
|
|
|
(2)
|
|
The Liquidity Facility for the
Class A Certificates will be sufficient to cover three
consecutive semiannual interest payments with respect to such
Class. There will be no Liquidity Facility for the Class B
Certificates.
|
S-5
|
|
|
Certificates Offered |
|
Class A Certificates.
|
|
|
|
Class B Certificates.
|
|
|
|
Each Class of Certificates will represent a fractional undivided
interest in a related Trust. |
|
Use of Proceeds |
|
The proceeds from the sale of the Certificates of each Trust
will be used by the respective Trustee to acquire Equipment
Notes to be held by such Trust. The Equipment Notes will be full
recourse obligations of Southwest. Southwest will use the
proceeds from the issuance of the Equipment Notes for general
corporate purposes. |
|
Subordination Agent, Trustee, Paying Agent and Loan Trustee
|
|
Wilmington Trust Company. |
|
Liquidity Provider |
|
BNP Paribas, acting through its New York branch. |
|
Trust Property |
|
The property of each Trust will include: |
|
|
|
Equipment Notes acquired by such Trust.
|
|
|
|
In the case of the Class A Trust, all
monies receivable under the Liquidity Facility.
|
|
|
|
Funds from time to time deposited with the
Trustee in accounts relating to such Trust, including payments
made by Southwest on the Equipment Notes held in such Trust.
|
|
Regular Distribution Dates |
|
February 1 and August 1, commencing on February 1,
2008. |
|
Record Dates |
|
The fifteenth day preceding the related Distribution Date,
which, in the case of Regular Distribution Dates, are
January 15 and July 15. |
|
Distributions |
|
The Trustee will distribute all payments of principal, premium
(if any) and interest received on the Equipment Notes held in
each Trust to the holders of the Certificates of such Trust,
subject to the subordination provisions applicable to the
Certificates. |
|
|
|
Scheduled payments of principal and interest made on the
Equipment Notes will be distributed on the applicable Regular
Distribution Dates. |
|
|
|
Payments of principal, premium (if any) and interest made on the
Equipment Notes resulting from any early redemption of such
Equipment Notes will be distributed on a Special Distribution
Date after not less than 15 days notice to
Certificateholders. |
|
Subordination |
|
Under the Intercreditor Agreement, after paying certain amounts
ranking senior to the distributions on the Certificates, the
Subordination Agent will make distributions on the Certificates
in the following order: |
|
|
|
First, to the holders of the Class A
Certificates to pay interest on the Class A Certificates.
|
|
|
|
Second, to the holders of Class B
Certificates to pay interest on the Preferred B Pool Balance.
|
|
|
|
Third, to the holders of the Class A
Certificates to make distributions in respect of the Pool
Balance of the Class A Certificates.
|
|
|
|
Fourth, to the holders of the Class B
Certificates to pay interest on the Pool Balance of the
Class B Certificates not previously distributed under
clause second above.
|
S-6
|
|
|
|
|
Fifth, to the holders of the Class B
Certificates to make distributions in respect of the Pool
Balance of the Class B Certificates.
|
|
Control of Loan Trustee |
|
The holders of at least a majority of the outstanding principal
amount of Equipment Notes issued under each Indenture will be
entitled to direct the Loan Trustee under such Indenture in
taking action as long as no Indenture Default is continuing
thereunder. If an Indenture Default is continuing, subject to
certain conditions, the Controlling Party will
direct the Loan Trustee under such Indenture (including in
exercising remedies, such as accelerating such Equipment Notes
or foreclosing the lien on the Aircraft securing such Equipment
Notes). |
|
|
|
The Controlling Party will be: |
|
|
|
The Class A Trustee.
|
|
|
|
Upon payment of Final Distributions to the
holders of Class A Certificates, the Class B Trustee.
|
|
|
|
Under certain circumstances, and
notwithstanding the foregoing, the Liquidity Provider.
|
|
|
|
Subject to certain conditions, notwithstanding the foregoing, if
one or more holders of the Class B Certificates have
purchased the Series A Equipment Notes issued under an
Indenture, pursuant to buyout rights described in
Right to Buy Series A Equipment Notes
below, the holder or holders of the majority in aggregate unpaid
principal amount of such Series A Equipment Notes issued
under such Indenture, rather than the Controlling Party, shall
be entitled to direct the Loan Trustee in exercising remedies
under such Indenture. |
|
|
|
In exercising remedies during the nine months after the earlier
of (a) the acceleration of the Equipment Notes issued
pursuant to any Indenture or (b) the bankruptcy of
Southwest, such Equipment Notes or the Aircraft subject to the
lien of such Indenture may not be sold for less than certain
specified minimums. |
|
Right to Buy Class A Certificates |
|
If Southwest is in bankruptcy and certain specified
circumstances then exist, the Class B Certificateholders
will have the right to purchase all but not less than all of the
Class A Certificates. |
|
|
|
The purchase price will be the outstanding balance of the
Class A Certificates plus accrued and unpaid interest. |
|
Right to Buy Series A Equipment Notes |
|
Subject to certain conditions, if Southwest is in bankruptcy and
certain specified events have occurred or if an Indenture
Default under any Indenture for the Series A Equipment
Notes has continued for five years without a disposition of the
related Series A Equipment Notes or Aircraft, during a
period of six months thereafter the Class B
Certificateholders will have the right to purchase all (but not
less than all) of the Series A Equipment Notes under any
one or more Indentures. |
|
|
|
The purchase price for any Series A Equipment Note will be
the outstanding principal amount of such Equipment Note plus
accrued and unpaid interest and certain other amounts. |
|
Liquidity Facility for Class A Certificates
|
|
Under the Liquidity Facility for the Class A Trust, the
Liquidity Provider will, if necessary, make advances in an
aggregate amount sufficient to pay interest on the Class A
Certificates on up to three successive semiannual Regular
Distribution Dates at the applicable |
S-7
|
|
|
|
|
interest rate for such Certificates. Drawings under the
Liquidity Facility cannot be used to pay any amount in respect
of the Class A Certificates other than interest. |
|
|
|
There will be no Liquidity Facility for the Class B Trust. |
|
|
|
Upon each drawing under the Liquidity Facility to pay interest
on the Class A Certificates, the Subordination Agent will
reimburse the Liquidity Provider for the amount of such drawing.
Such reimbursement obligation and all interest, fees and other
amounts owing to the Liquidity Provider under the Liquidity
Facility and certain other agreements will rank senior to the
Certificates in right of payment. |
|
Issuance of Equipment Notes |
|
On the Issuance Date, pursuant to the Participation Agreement
and Indenture for each Aircraft and subject to certain customary
conditions precedent contained therein, Southwest will issue
Series A and Series B Equipment Notes, which will be
purchased, respectively, by the Class A and Class B
Trusts using the proceeds from the issuance of the Certificates. |
|
Issuances of Additional Classes of Certificates
|
|
After the Issuance Date, additional pass through certificates of
one or more separate pass through trusts, which will evidence
fractional undivided ownership interests in equipment notes
secured by Aircraft, may be issued. Any such transaction may
relate to a refinancing of Series B Equipment Notes issued
with respect to all (but not less than all) of the Aircraft or
the issuance of one or more new series of subordinated equipment
notes with respect to some or all of the Aircraft. Consummation
of any such transaction will be subject to satisfaction of
certain conditions, including receipt of confirmation from the
Rating Agencies that it will not result in a withdrawal,
suspension or downgrading of any Class of Certificates that
remains outstanding. See Possible Issuance of Additional
Certificates and Refinancing of Certificates. |
|
Equipment Notes |
|
|
|
(a) Issuer |
|
Southwest. |
|
(b) Interest |
|
The Equipment Notes held in each Trust will accrue interest at
the rate per annum for the Certificates issued by such Trust set
forth on the cover page of this Prospectus Supplement. Interest
will be payable on February 1 and August 1 of each year,
commencing on the first such date after issuance of such
Equipment Notes. Interest is calculated on the basis of a
360-day year
consisting of twelve
30-day
months. |
|
(c) Principal |
|
Principal payments on the Equipment Notes held for the
Class A and Class B Certificates are scheduled on
February 1 and August 1 in certain years, commencing on
February 1, 2008. |
|
(d) Redemption and Purchase |
|
Aircraft Event of Loss. If an Event of Loss occurs with
respect to an Aircraft, all of the Equipment Notes issued with
respect to such Aircraft will be redeemed, unless Southwest
replaces such Aircraft under the related financing agreements.
The redemption price in such case will be the unpaid principal
amount of such Equipment Notes, together with accrued interest,
but without any premium. |
|
|
|
Optional Redemption. Southwest may elect to redeem all of
the Equipment Notes issued with respect to an Aircraft prior to
maturity. In addition, Southwest may elect to redeem
(i) the Series B Equipment Notes with respect to all
Aircraft in connection with a refinancing of such |
S-8
|
|
|
|
|
Series or (ii) the Series B Equipment Notes with
respect to all (but not less than all) Aircraft without issuing
any new equipment notes; provided, that the Series B
Equipment Notes described in the preceding clause (ii) may
be so redeemed only if the Rating Agencies have provided a
confirmation that such redemption will not result in a
withdrawal, suspension or downgrading of the ratings on any
Class of Certificates then rated by the Rating Agencies that
will remain outstanding. |
|
|
|
The redemption price in any optional redemption of the Equipment
Notes by Southwest will be the unpaid principal amount of such
Equipment Notes, together with accrued interest and Make-Whole
Premium. |
|
|
|
Upon completion of any redemption of all Equipment Notes with
respect to an Aircraft, so long as no Related Payment Default or
Indenture Default has occurred and is continuing under any other
Indenture, the relevant Aircraft will be released from the lien
of the Indenture and cease to be included as collateral for any
Equipment Notes. See Description of the Equipment
NotesRedemption. |
|
(e) Security |
|
The Equipment Notes issued with respect to each Aircraft will be
secured by a security interest in such Aircraft. |
|
(f) Cross-collateralization |
|
The Equipment Notes held in the Trusts will be
cross-collateralized. This means that any proceeds from the
exercise of remedies with respect to an Aircraft will be
available to cover shortfalls then due under Equipment Notes
issued with respect to the other Aircraft. In the absence of any
such shortfall, excess proceeds will be held by the relevant
Loan Trustee as additional collateral for such other Equipment
Notes. |
|
(g) Cross-default |
|
The only cross-default in the Indentures is if (x) all
amounts owing under any Equipment Note issued under another
Indenture have not been paid in full on or before August 1,
2022 (the Final Payment Date), and (y) any such
failure shall continue unremedied for a period of twenty
(20) Business Days thereafter. Therefore, prior to the
triggering of the cross-default, if the Equipment Notes issued
under one or more Indentures are in default and the Equipment
Notes issued under the remaining Indentures are not in default,
no remedies will be exercisable under such remaining Indentures. |
|
|
|
So long as no Related Payment Default or Indenture Default has
occurred and is continuing under any other Indenture, if
(x) Southwest exercises its right to redeem all the
Equipment Notes under an Indenture or (y) in any other
circumstance, all the Equipment Notes under an Indenture are
paid in full, the Aircraft subject to the lien of such Indenture
would be released. Once the lien on an Aircraft is released,
that Aircraft will no longer secure the amounts owing under the
other Indentures. |
|
(h) Cross-subordination |
|
Payments on the Series B Equipment Notes will be
subordinate and subject in right of payment to the prior payment
in full of all amounts in respect of the Series A Equipment
Notes. |
|
|
|
By virtue of the Intercreditor Agreement, all of the Equipment
Notes held by the Subordination Agent will be effectively
cross-subordinated. This means that payments received on
Series B Equipment Notes held by the Subordination Agent
may be applied in accordance |
S-9
|
|
|
|
|
with the priority of payment provisions set forth in the
Intercreditor Agreement to make distributions on the
Class A Certificates. If a Class B Certificateholder
has exercised its buyout right for any Series A Equipment
Notes, such Equipment Notes will be held by such
Certificateholder, not the Subordination Agent, and will not be
subject to the cross-subordination provisions of the
Intercreditor Agreement. |
|
(i) Section 1110 Protection |
|
Vinson & Elkins L.L.P. will provide its opinion to the
Trustees that the benefits of Section 1110 of the U.S.
Bankruptcy Code will be available with respect to the Equipment
Notes. |
|
Certain Federal Income Tax Considerations
|
|
The Trusts themselves will not be subject to federal income tax.
Each Certificateholder should report on its federal income tax
return its pro rata share of the income from the Equipment Notes
(including amounts paid by the Liquidity Provider), if any, and
the other property held by the relevant Trust, in accordance
with the Certificateholders method of accounting. See
Certain U.S. Federal Income Tax Considerations. |
|
Certain ERISA Considerations |
|
Each person who acquires a Certificate will be deemed to have
represented that either: (a) no employee benefit plan
assets have been used to purchase or hold such Certificate or
(b) the purchase and holding of such Certificate are exempt
from the prohibited transaction restrictions of ERISA and the
Code pursuant to one or more prohibited transaction statutory or
administrative exemptions. See Certain ERISA
Considerations. |
|
Ratings of the Certificates |
|
It is a condition to the issuance of the Certificates that they
be rated by Moodys Investors Service, Inc.
(Moodys) and Standard & Poors
Ratings Services, a division of The McGraw-Hill Companies, Inc.
(Standard & Poors and together with
Moodys, the Rating Agencies) not less than the
ratings set forth below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard &
|
Certificates
|
|
Moodys
|
|
Poors
|
|
Class A
|
|
|
Aa3
|
|
|
|
AA−
|
|
Class B
|
|
|
Baa1
|
|
|
|
A
|
|
|
|
|
|
|
A rating is not a recommendation to purchase, hold or sell
Certificates, since such rating does not address market price or
suitability for a particular investor. There can be no assurance
that such ratings will not be lowered, suspended or withdrawn by
a Rating Agency after the Certificates have been issued. |
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard &
|
|
|
|
|
Moodys
|
|
Poors
|
|
Threshold Ratings for the
Liquidity Provider
|
|
Short Term
|
|
P-1
|
|
A-1+
|
|
|
|
|
|
|
|
Liquidity Provider Rating
|
|
The Liquidity Provider meets the
Liquidity Threshold Rating requirement.
|
S-10
You should carefully review the information included
elsewhere or incorporated by reference in this Prospectus
Supplement and the accompanying Prospectus and should
particularly consider the following matters.
Risk Factors Relating to the Company
You should consider the following risk factors carefully in
evaluating Southwests business. The Companys
business, financial condition or results of operations could be
materially adversely affected by any of these risks. Additional
risks not presently known to the Company (or that the Company
currently deems immaterial) may also impair its business,
financial condition or results of operations.
Southwests
business is dependent on the price and availability of aircraft
fuel. Continued periods of high fuel costs and/or significant
disruptions in the supply of fuel, could adversely affect our
results of operations.
Airline operators are inherently dependent upon energy to
operate and, therefore, are impacted by changes in jet fuel
prices. The cost of fuel, which has been at an historically high
level since 2005, is largely unpredictable and has a significant
impact on the Companys results of operations. Jet fuel and
oil consumed for the first six months of 2007, fiscal 2006 and
fiscal 2005 represented approximately 27 percent,
26 percent and 20 percent of Southwests total
operating expenses, respectively. Fuel availability, as well as
pricing, is also impacted by political and economic factors. We
do not currently anticipate a significant reduction in fuel
availability; however, it is difficult to predict the future
availability of jet fuel due to the following, among other,
factors: dependency on foreign imports of crude oil and the
potential for hostilities or other conflicts in oil producing
areas; limited refining capacity; and the impact of possible
changes in governmental policies on jet fuel production,
transportation, and marketing. Significant disruptions in the
supply of aircraft fuel could have a negative impact on the
Companys business, operations or results of operations.
Due to the competitive nature of the airline industry, the
Companys ability to increase fares is limited, and it is
not certain that future fuel cost increases can be covered by
increasing fares. From time to time the Company enters into fuel
derivative contracts to protect against rising fuel costs.
Changes in the Companys overall fuel hedging strategy, the
ability of the commodities used in fuel hedging (principally
crude oil, heating oil and unleaded gasoline) to qualify for
special hedge accounting, and the effectiveness of the
Companys fuel hedges pursuant to highly complex accounting
rules, are all significant factors impacting the Companys
results of operations.
Southwests
business is labor-intensive; we could be adversely affected if
we are unable to maintain satisfactory relations with any
unionized or other Employee work group.
The airline business is labor intensive. Wages, salaries, and
benefits represented approximately 37 percent of the
Companys operating expenses for fiscal 2006. In addition,
as of December 31, 2006, approximately 82 percent of
the Companys Employees were represented for collective
bargaining purposes by labor unions. The Companys Pilots
are covered by a collective bargaining agreement with the
Southwest Airlines Pilots Association (SWAPA),
which became amendable during September 2006. The Company and
SWAPA are currently engaged in discussions on a new agreement.
Five other collective bargaining agreements become amendable in
2008; the agreement with Transport Workers Union, Local 556
covering the Companys Flight Attendants becomes amendable
in May 2008; the agreement with Transport Workers Union, Local
555 covering the Companys Ramp, Provisioning, Operations
and Freight Agents becomes amendable in June 2008; the agreement
with the International Brotherhood of Teamsters covering the
Companys Maintenance Stock Clerks becomes amendable in
August 2008; the agreement with the Airline Mechanics Fraternal
Association covering the Companys Mechanics becomes
amendable in August 2008; and the agreement with the
International Association of Machinists and Aerospace Workers
covering the Companys Reservation and Customer Service
Agents becomes amendable in October 2008. Although,
historically, the Companys relationship with its Employees
has been good, the following items could have a significant
impact on the Companys results of operations: outcome of
labor contract
S-11
negotiations, Employee hiring and retention rates, pay rates,
outsourcing costs, the impact of work rules and costs for health
care and other benefits.
Southwests
business is affected by many changing economic and other
conditions beyond its control.
Our business, and the airline industry in general, is
particularly impacted by changes in economic and other
conditions that are largely outside our control, including,
among others:
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actual or potential changes in international, national,
regional, and local economic, business, and financial
conditions, including recession, inflation, interest rate
increases, war, terrorist attacks and political instability;
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changes in consumer preferences, perceptions, spending patterns
or demographic trends;
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actual or potential disruptions in the air traffic control
system;
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increases in costs of safety, security and environmental
measures; and
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weather and natural disasters.
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Because expenses of a flight do not vary significantly with the
number of passengers carried, a relatively small change in the
number of passengers can have a disproportionate effect on an
airlines operating and financial results. Therefore, any
general reduction in airline passenger traffic as a result of
any of these factors could adversely affect our business,
financial condition or results of operations.
Southwest
relies on technology to operate its business, and any failure of
these systems could harm the Company.
Southwest is increasingly dependent on automated systems and
technology to operate its business, enhance Customer Service and
back office support systems, and increase Employee productivity,
including the Companys computerized airline reservation
system, flight operations systems, telecommunication systems,
website at www.southwest.com, Automated Boarding Passes system,
and the
E-Ticket
Check-In self service kiosks. Any disruptions in these systems
due to internal failures of technology or large-scale external
interruptions in technology infrastructure, such as power,
telecommunications, or the internet, could result in the loss of
revenue or important data, increase the Companys expenses,
and generally harm the Companys business. In addition, our
growth strategies may be dependent on our ability to effectively
implement technology advancements.
The
travel industry continues to face on-going security concerns and
cost burdens; further threatened or actual terrorist attacks, or
other hostilities, could significantly harm our industry and our
business.
The attacks of September 11, 2001, materially impacted, and
continue to impact, air travel and the results of operations for
Southwest and the airline industry generally. The Department of
Homeland Security and the Transportation Security Administration
have implemented numerous security measures that affect airline
operations and costs. Substantially all security screeners at
airports are now federal employees, and significant other
elements of airline and airport security are now overseen and
performed by federal employees, including federal security
managers, federal law enforcement officers, and federal air
marshals. Enhanced security procedures, including enhanced
security screening of passengers, baggage, cargo, mail,
employees, and vendors, introduced at airports since the
terrorist attacks of September 11 have increased costs to
airlines and have from time to time impacted demand for air
travel.
Additional terrorist attacks, even if not made directly on the
airline industry, or the fear of such attacks or other
hostilities (including elevated national threat warnings or
selective cancellation or redirection of flights due to terror
threats) could have a further significant negative impact on
Southwest and the airline industry. The war in Iraq further
decreased demand for air travel during the first half of 2003,
and additional international hostilities could potentially have
a material adverse impact on the Companys results of
operations.
S-12
Airport
capacity constraints and air traffic control inefficiencies
could limit the Companys growth; changes in or additional
governmental regulation could increase the Companys
operating costs or otherwise limit the Companys ability to
conduct business.
Almost all commercial service airports are owned
and/or
operated by units of local or state government. Airlines are
largely dependent on these governmental entities to provide
adequate airport facilities and capacity at an affordable cost.
Similarly, the federal government singularly controls all
U.S. airspace, and airlines are completely dependent on the
FAA to operate that airspace in a safe, efficient, and
affordable manner. Airlines are also subject to other extensive
regulatory requirements. These requirements often impose
substantial costs on airlines. Our business, operations or
results of operations may be adversely affected by changes in
law and future actions taken by governmental agencies having
jurisdiction over our operations, including:
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increases in airport rates and charges;
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limitations on airport gate capacity or other use of airport
facilities;
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increases in taxes;
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changes in the law that affect the services that can be offered
by airlines in particular markets and at particular airports;
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restrictions on competitive practices;
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the adoption of regulations that impact customer service
standards, such as security standards; and
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the adoption of more restrictive locally-imposed noise
restrictions.
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The
airline industry is intensely competitive.
The airline industry is extremely competitive. Southwests
competitors include other major domestic airlines, as well as
regional and new entrant airlines, and other forms of
transportation, including rail and private automobiles. The
Companys revenues are sensitive to the actions of other
carriers in the areas of capacity, pricing, scheduling,
codesharing, and promotions.
Southwests
low cost structure is one of its primary competitive advantages,
and many factors could affect the Companys ability to
control its costs.
Factors affecting the Companys ability to control its
costs include the price and availability of fuel, results of
Employee labor contract negotiations, Employee hiring and
retention rates, costs for health care, capacity decisions by
the Company and its competitors, unscheduled required aircraft
airframe or engine repairs, regulatory requirements,
availability of capital markets and future financing decisions
made by the Company.
Risk Factors Relating to the Certificates and the
Offering
The
appraisals are only estimates of Aircraft value.
Three independent appraisal and consulting firms have prepared
appraisals of the Aircraft. Letters summarizing such appraisals
are annexed to this Prospectus Supplement as Appendix II.
Such appraisals are based on varying assumptions and
methodologies, which differ among the appraisers, and were
prepared without physical inspection of the Aircraft. Appraisals
that are based on other assumptions and methodologies may result
in valuations that are materially different from those contained
in such appraisals. See Description of the Aircraft and
the AppraisalsThe Appraisals.
An appraisal is only an estimate of value. It does not indicate
the price at which an Aircraft may be purchased from the
Aircraft manufacturer. Nor should an appraisal be relied upon as
a measure of realizable value. In particular, each appraisal is
an estimate of value as of the date of such appraisal. The
proceeds realized upon a sale of any Aircraft may be less than
its appraised value. The value of an Aircraft if remedies are
exercised under the applicable Indenture will depend on market
and economic conditions, the supply of similar aircraft, the
availability
S-13
of buyers, the condition of the Aircraft and other factors.
Accordingly, there can be no assurance that the proceeds
realized upon any such exercise of remedies would be sufficient
to satisfy in full payments due on the Certificates.
Payments
to Certificateholders will be subordinated to certain amounts
payable to other parties.
Under the Intercreditor Agreement, the Liquidity Provider will
receive payment of all amounts owed to it, including
reimbursement of drawings made to pay interest on the
Class A Certificates, before the holders of any Class of
Certificates receive any funds. In addition, the Subordination
Agent and the Pass Through Trustees will receive some payments
before the holders of any Class of Certificates receive
distributions.
Payments of principal on the Certificates are subordinated to
payments of interest on the Certificates, subject to certain
limitations and certain other payments. Consequently, a payment
default under any Equipment Note or a Triggering Event may cause
the distribution of interest on the Certificates or such other
amounts from payments received with respect to principal on one
or more series of Equipment Notes. If this occurs, the interest
accruing on the remaining Equipment Notes may be less than the
amount of interest expected to be distributed on the remaining
Certificates. This is because the interest on the Certificates
may be based on a Pool Balance that exceeds the outstanding
principal balance of the remaining Equipment Notes. As a result
of this possible interest shortfall, the holders of the
Certificates may not receive the full amount expected after a
payment default under any Equipment Note even if all Equipment
Notes are eventually paid in full. For a more detailed
discussion of the subordination provisions of the Intercreditor
Agreement, see Description of the Intercreditor
AgreementPriority of Distributions.
The
buyout of Series A Equipment Notes with respect to an
Aircraft by the Class B Certificateholders may reduce the
amounts payable to the Certificateholders.
After the occurrence of certain events, Class B
Certificateholders have the right to purchase the Series A
Equipment Notes issued under any Indenture. The purchase price
paid by any Class B Certificateholder will be distributed
pursuant to the Intercreditor Agreement and will be subject to
the subordination provisions set forth therein. See
Description of the Intercreditor AgreementPriority
of Distributions. After such purchase, the purchased
Equipment Notes will no longer be subject to the
cross-subordination provisions of the Intercreditor Agreement.
Any payments
and/or
proceeds distributable under such Indenture will be paid first
to the purchaser (or then current holder) of the purchased
Series A Equipment Notes in respect of amounts due and
owing on such Series A Equipment Notes and such amounts
will not be paid to the Subordination Agent for distribution to
the Certificateholders under the Intercreditor Agreement. As
such, Certificateholders will not receive any distribution in
respect of such Indenture, including interest distributions on
the Class B Certificates, until all amounts due on such
Series A Equipment Notes have been paid in full.
Certain
Certificateholders may not have the right to participate in
controlling the exercise of remedies in a default
scenario.
If an Indenture Default is continuing, subject to certain
conditions, the Loan Trustee under such Indenture will be
directed by the Controlling Party in exercising
remedies under such Indenture, including accelerating the
applicable Equipment Notes or foreclosing the lien on the
Aircraft securing such Equipment Notes. See Description of
the CertificatesIndenture Defaults and Certain Rights Upon
an Indenture Default.
The Controlling Party will be:
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The Class A Trustee.
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Upon payment of final distributions to the holders of
Class A Certificates, the Class B Trustee.
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Under certain circumstances, and notwithstanding the foregoing,
the Liquidity Provider.
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Subject to certain conditions, notwithstanding the foregoing, if
one or more holders of the Class B Certificates have
purchased the Series A Equipment Notes issued under an
Indenture, the holders of the majority in aggregate unpaid
principal amount of Equipment Notes issued under such Indenture
shall be entitled to direct the Loan Trustee in exercising
remedies under such Indenture.
S-14
As a result of the foregoing, if the Trustee for a Class of
Certificates is not the Controlling Party with respect to an
Indenture (or, in the case of an Indenture under which there has
been an Equipment Note buyout as described in the preceding
paragraph, where such Trustee holds less than a majority of the
outstanding principal amount of Equipment Notes issued under
such Indenture), the Certificateholders of that Class will have
no rights to participate in directing the exercise of remedies
under such Indenture.
The
exercise of remedies over Equipment Notes may result in
shortfalls without further recourse.
During the continuation of any Indenture Default under an
Indenture, the Equipment Notes issued under such Indenture may
be sold in the exercise of remedies with respect to that
Indenture, subject to certain limitations. See Description
of the Intercreditor AgreementIntercreditor
RightsLimitation on Exercise of Remedies. The market
for Equipment Notes during any Indenture Default may be very
limited, and there can be no assurance as to the price at which
they could be sold. If any Equipment Notes are sold for less
than their outstanding principal amount, certain
Certificateholders will receive a smaller amount of principal
distributions under the relevant Indenture than anticipated and
will not have any claim for the shortfall against Southwest, the
Liquidity Provider or any Trustee.
The
ratings of the Certificates are not a recommendation to buy and
may be lowered or withdrawn in the future.
It is a condition to the issuance of the Certificates that the
Class A Certificates be rated not lower than Aa3 by
Moodys and AA− by Standard & Poors
and the Class B Certificates be rated not lower than Baa1
by Moodys and A by Standard & Poors. A
rating is not a recommendation to purchase, hold or sell
Certificates, because such rating does not address market price
or suitability for a particular investor. A rating may not
remain unchanged for any given period of time and may be
lowered, suspended or withdrawn entirely by a Rating Agency if
in its judgment circumstances in the future (including the
downgrading of Southwest or the Liquidity Provider) so warrant.
The rating of the Certificates is based primarily on the default
risk of the Equipment Notes, the availability of the Liquidity
Facility for the benefit of holders of the Class A
Certificates, the collateral value provided by the Aircraft
relating to the Equipment Notes, the cross-collateralization
provisions applicable to the Indentures and the subordination
provisions applicable to the Certificates. These ratings address
the likelihood of timely payment of interest (at the Stated
Interest Rate and without any premium) when due on the
Certificates and the ultimate payment of principal distributable
under the Certificates by the Final Maturity Date. The ratings
do not address the possibility of certain defaults, optional
redemptions or other circumstances, which could result in the
payment of the outstanding principal amount of the Certificates
prior to the final expected Distribution Date. Any cash
collateral held as a result of the cross-collateralization of
the Equipment Notes would not be entitled to the benefits of
Section 1110. The ratings apply only to the Certificates
and not the Equipment Notes, regardless of whether any such
Equipment Notes are purchased by a Certificateholder pursuant to
the purchase rights described under Description of the
Intercreditor AgreementIntercreditor RightsEquipment
Note Buyout Rights of Subordinated Certificateholders.
There
may be a limited market for resale of
Certificates.
Prior to this offering, there has been no public market for the
Certificates. Neither Southwest nor any Trust intends to apply
for listing of the Certificates on any securities exchange or
otherwise. The Underwriters may assist in resales of the
Certificates, but they are not required to do so. A secondary
market for the Certificates may not develop. If a secondary
market does develop, it might not continue or it might not be
sufficiently liquid to allow you to resell any of your
Certificates.
S-15
The proceeds from the sale of the Certificates of each Trust
will be used by the respective Trustee to acquire Equipment
Notes to be held by such Trust. The Equipment Notes will be full
recourse obligations of Southwest. Southwest will use the
proceeds from the issuance of the Equipment Notes for general
corporate purposes.
S-16
Southwest is a major passenger airline that provides scheduled
air transportation in the United States. Based on the most
recent data available from the Department of Transportation,
Southwest is the largest carrier in the United States, as
measured by originating passengers boarded and scheduled
domestic departures. Southwest was incorporated in Texas in 1967
and commenced Customer Service on June 18, 1971, with three
Boeing 737 aircraft serving three Texas citiesDallas,
Houston and San Antonio. At August 31, 2007, Southwest
operated 508 Boeing 737 aircraft and provided service to
64 cities in 32 states throughout the United States.
The Company resumed service at San Francisco International
Airport in August 2007.
Southwest focuses principally on point-to-point, rather than
hub-and-spoke,
service, providing its markets with frequent, conveniently timed
flights and low fares. At August 31, 2007, Southwest served
410 nonstop city pairs. Historically, Southwest has served
predominantly short-haul routes, with high frequencies. In
recent years, the Company has complemented this service with
more medium to long-haul routes, including transcontinental
service.
Additional information concerning the Company is included in its
reports and other documents incorporated by reference in this
Prospectus Supplement. See Incorporation of Certain
Documents by Reference.
Recent
Development
On July 19, 2007, Southwest announced that
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Herbert D. Kelleher, age 76, will continue as Executive
Chairman of the Board for one year and will step down from that
position at the Companys 2008 Annual Meeting of
Shareholders. Mr. Kelleher is a Founder of Southwest and
has served as Executive Chairman since 1978. From 1981 through
June 2001, Mr. Kelleher also served as President and Chief
Executive Officer of Southwest.
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Colleen C. Barrett, age 62, will continue as President for
one year and will step down from that position on July 15,
2008. Also, she will retire from the Board of Directors at the
2008 Annual Meeting of Shareholders. Ms. Barrett has served
as Secretary of the Corporation since 1978; Vice President
Administration from 1986 to 1990; Executive Vice President
Customers from 1990 to 2001; and President since 2001.
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Gary C. Kelly, age 52, will remain as Chief Executive
Officer with a contract expiration date of February 1,
2011. Mr. Kelly began his career at Southwest as Controller
in 1986; was named Vice President Finance and Chief Financial
Officer in 1989; Executive Vice President and Chief Financial
Officer in 2001; and Chief Executive Officer and Vice Chairman
in July 2004.
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For additional information, see our Current Report on
Form 8-K
filed with the Commission on July 20, 2007, which is
incorporated by reference into this Prospectus Supplement.
S-17
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth Southwests historical
ratios of earnings to fixed charges for the periods indicated.
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Six Months Ended
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Year Ended December 31,
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June 30,
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2002
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2003
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2004
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2005
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2006
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2006
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2007
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2.20
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3.47
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2.36
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3.74
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3.68
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5.14
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5.25
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Earnings represent:
* Income before income taxes, excluding the cumulative effect of
accounting changes; plus
* Fixed charges, excluding capitalized interest.
Fixed charges include:
* Interest, whether expensed or capitalized; and
* A portion of rental expense. Our management believes this is
representative of the interest factor in those periods.
S-18
DESCRIPTION OF THE CERTIFICATES
The following summary describes the material terms of the
Certificates. The summary does not purport to be complete and is
qualified in its entirety by reference to all of the provisions
of the Basic Agreement, which was filed with the Commission as
an exhibit to the Companys
Form S-3
Registration Statement
No. 333-126738,
and to all of the provisions of the Certificates, the
Trust Supplements and the Intercreditor Agreement, each of
which will be filed as an exhibit to a Current Report on
Form 8-K
to be filed by Southwest with the Commission.
Except as otherwise indicated, the following summary relates to
each of the Trusts and the Certificates issued by each Trust.
The references to Sections in parentheses in the following
summary are to the relevant Sections of the Basic Agreement
unless otherwise indicated.
Each Pass Through Certificate (collectively, the
Certificates) will represent a fractional undivided
interest in one of the two Southwest Airlines
2007-1 Pass
Through Trusts (the Class A Trust and the
Class B Trust, and, collectively, the
Trusts). The Trusts will be formed pursuant to a
pass through trust agreement between Southwest and Wilmington
Trust Company, as trustee (the Trustee), dated
as of July 1, 2005 (the Basic Agreement), and
two separate supplements thereto (each, a
Trust Supplement and, together with the Basic
Agreement, collectively, the Pass Through
Trust Agreements) relating to such Trusts between
Southwest and the Trustee, as trustee under the Class A
Trust (the Class A Trustee) and trustee under
the Class B Trust (the Class B Trustee).
The Certificates to be issued by the Class A Trust and the
Class B Trust are referred to herein as the
Class A Certificates and the Class B
Certificates, respectively.
Each Certificate will represent a fractional undivided interest
in the Trust created by the Basic Agreement and the applicable
Trust Supplement pursuant to which such Certificate is
issued. (Section 2.01) The Trust Property of each
Trust (the Trust Property) will consist of:
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Subject to the Intercreditor Agreement, Equipment Notes acquired
under the Participation Agreements and issued by Southwest on a
recourse basis in connection with each separate secured loan
transaction with respect to each Aircraft and all monies paid or
due to be paid on such Equipment Notes. Equipment Notes held in
each Trust will be registered in the name of the Subordination
Agent on behalf of such Trust for purposes of giving effect to
provisions of the Intercreditor Agreement.
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The rights of such Trust under the Participation Agreements, the
Indentures, and the Intercreditor Agreement (including all
monies receivable in respect of such rights).
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In the case of the Class A Trust, all monies receivable
under the Liquidity Facility for such Trust.
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Funds from time to time deposited with the applicable Trustee in
accounts relating to such Trust (such as interest and principal
payments on the Equipment Notes held in such Trust).
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The Certificates of each Trust will be issued in fully
registered form only and will be subject to the provisions
described below under Book Entry; Delivery and
Form. The Certificates will be issued only in minimum
denominations of $1,000 or integral multiples thereof, except
that one Certificate of each Trust may be issued in a different
denomination. (Section 3.01)
The Certificates represent interests in the respective Trusts,
and all payments and distributions thereon will be made only
from the Trust Property of the related Trust.
(Section 3.09) The Certificates do not represent an
interest in or obligation of Southwest, the Trustees or any of
the Loan Trustees or any affiliate of any thereof.
Payments and Distributions
Payments of principal, premium (if any) and interest on the
Equipment Notes or with respect to other Trust Property
held in each Trust will be distributed by the Trustee to
Certificateholders of such Trust on the date receipt of such
payment is confirmed, except in the case of certain types of
Special Payments.
S-19
Interest
The Equipment Notes held in each Trust will accrue interest at
the applicable rate per annum for Certificates to be issued by
such Trust set forth on the cover page of this Prospectus
Supplement, payable on February 1 and August 1 of each year,
commencing on February 1, 2008. Such interest payments will
be distributed to Certificateholders of such Trust on each such
date until the final Distribution Date for such Trust, subject
in the case of payments on the Equipment Notes to the
Intercreditor Agreement. Interest is calculated on the basis of
a 360-day
year consisting of twelve
30-day
months.
Payments of interest applicable to the Certificates to be issued
by the Class A Trust will be supported by a Liquidity
Facility to be provided by the Liquidity Provider for the
benefit of the holders of such Certificates in an aggregate
amount sufficient to pay interest thereon at the Stated Interest
Rate for such Trust on up to three successive Regular
Distribution Dates (without regard to any future payments of
principal on such Certificates). The Liquidity Facility for the
Class A Certificates does not provide for drawings or
payments thereunder to pay for principal of or premium, if any,
on the Class A Certificates, any interest on the
Class A Certificates in excess of the Stated Interest Rate
for such Trust, or, notwithstanding the subordination provisions
of the Intercreditor Agreement, principal of or interest or
premium, if any, on the Class B Certificates. Therefore,
only the holders of the Certificates to be issued by the
Class A Trust will be entitled to receive and retain the
proceeds of drawings under the Liquidity Facility. See
Description of the Liquidity Facility for Class A
Certificates. The Class B Certificates will not have
the benefit of a liquidity facility.
Principal
Payments of principal on the Equipment Notes held on behalf of
the Class A and Class B Trusts are scheduled to be
received by the Trustee on February 1 and August 1 in certain
years depending upon the terms of the Equipment Notes held in
such Trust.
Scheduled payments of interest or principal on the Equipment
Notes are herein referred to as Scheduled Payments,
and February 1 and August 1 of each year, commencing on
February 1, 2008, until the final expected Regular
Distribution Date are herein referred to as Regular
Distribution Dates. See Description of the Equipment
NotesPrincipal and Interest Payments.
Distributions
The Trustee of each Trust will distribute, subject to the
Intercreditor Agreement, on each Regular Distribution Date to
the Certificateholders of such Trust all Scheduled Payments
received in respect of Equipment Notes held on behalf of such
Trust, the receipt of which is confirmed by the Trustee on such
Regular Distribution Date. Each Certificateholder of each Trust
will be entitled to receive its proportionate share, based upon
its fractional interest in such Trust, subject to the
Intercreditor Agreement, of principal or interest on Equipment
Notes held on behalf of such Trust. Each such distribution of
Scheduled Payments will be made by the applicable Trustee to the
Certificateholders of record of the relevant Trust on the record
date applicable to such Scheduled Payment subject to certain
exceptions. (Sections 4.01 and 4.02) If a Scheduled Payment
is not received by the applicable Trustee on a Regular
Distribution Date but is received within five days thereafter,
it will be distributed on the date received to such holders of
record. If it is received after such
five-day
period, it will be treated as a Special Payment and distributed
as described below.
Any payment in respect of, or any proceeds of, any Equipment
Note, or Collateral under (and as defined in) any Indenture
other than a Scheduled Payment (each, a Special
Payment) will be distributed on, in the case of an early
redemption or a purchase of any Equipment Note, the date of such
early redemption or purchase (which shall be a Business Day),
and otherwise on the Business Day specified for distribution of
such Special Payment pursuant to a notice delivered by each
Trustee as soon as practicable after the Trustee has received
funds for such Special Payment (each, a Special
Distribution Date). Any such distribution will be subject
to the Intercreditor Agreement.
Triggering Event means (x) the occurrence of an
Indenture Default under all Indentures resulting in a PTC Event
of Default with respect to the most senior Class of Certificates
then outstanding, (y) the acceleration of all of
S-20
the outstanding Equipment Notes or (z) certain events of
bankruptcy, reorganization or insolvency with respect to
Southwest described in the Intercreditor Agreement (a
Southwest Bankruptcy Event).
Each Trustee will mail a notice to the Certificateholders of the
applicable Trust stating the scheduled Special Distribution
Date, the related record date, the amount of the Special Payment
and the reason for the Special Payment. In the case of a
redemption or purchase of the Equipment Notes held in the
related Trust, such notice will be mailed not less than
15 days prior to the date such Special Payment is scheduled
to be distributed, and in the case of any other Special Payment,
such notice will be mailed as soon as practicable after the
Trustee has confirmed that it has received funds for such
Special Payment. (Trust Supplements, Section 3.03)
Each distribution of a Special Payment, other than a final
distribution, on a Special Distribution Date for any Trust will
be made by the Trustee to the Certificateholders of record of
such Trust on the record date applicable to such Special
Payment. (Trust Supplements, Section 3.03) See
Indenture Defaults and Certain Rights Upon an
Indenture Default and Description of the Equipment
NotesRedemption.
Each Pass Through Trust Agreement requires that the Trustee
establish and maintain, for the related Trust and for the
benefit of the Certificateholders of such Trust, one or more
non-interest bearing accounts (the Certificate
Account) for the deposit of payments representing
Scheduled Payments received by such Trustee. Each Pass Through
Trust Agreement requires that the Trustee establish and
maintain, for the related Trust and for the benefit of the
Certificateholders of such Trust, one or more accounts (the
Special Payments Account) for the deposit of
payments representing Special Payments received by such Trustee,
which shall be non-interest bearing except in certain
circumstances where the Trustee may invest amounts in such
account in certain permitted investments. Pursuant to the terms
of each Pass Through Trust Agreement, the Trustee is
required to deposit any Scheduled Payments relating to the
applicable Trust received by it in the Certificate Account of
such Trust and to deposit any Special Payments so received by it
in the Special Payments Account of such Trust.
(Section 4.01; Trust Supplements, Section 3.02)
All amounts so deposited will be distributed by the Trustee on a
Regular Distribution Date or a Special Distribution Date, as
appropriate. (Section 4.02(a); Trust Supplements,
Section 3.03)
The final distribution for each Trust will be made only upon
presentation and surrender of the Certificates for such Trust at
the office or agency of the Trustee specified in the notice
given by the Trustee of such final distribution. The Trustee
will mail such notice of the final distribution to the
Certificateholders of such Trust, specifying the date set for
such final distribution and the amount of such distribution.
(Trust Supplements, Section 7.01) See
Termination of the Trusts below. Distributions
in respect of Certificates issued in global form will be made as
described in Book Entry; Delivery and Form
below.
If any Distribution Date is a Saturday, Sunday or other day on
which commercial banks are authorized or required to close in
New York, New York, Dallas, Texas or Wilmington, Delaware (any
other day being a Business Day), distributions
scheduled to be made on such Regular Distribution Date or
Special Distribution Date will be made on the next succeeding
Business Day, without additional interest. (Section 12.11)
The Pool Balance for each Trust or for the
Certificates issued by any Trust indicates, as of any date, the
original aggregate face amount of the Certificates of such Trust
less the aggregate amount of all payments made as of such date
in respect of the Certificates of such Trust other than payments
made in respect of interest or premium or reimbursement of any
costs or expenses incurred in connection therewith. The Pool
Balance for each Trust or for the Certificates issued by any
Trust as of any Distribution Date shall be computed after giving
effect to payment of principal of the Equipment Notes or payment
with respect to other Trust Property held in such Trust and
the distribution thereof to be made on that date.
(Trust Supplements, Section 2.01)
The Pool Factor for each Trust or for the
Certificates issued by any Trust as of any Distribution Date is
the quotient (rounded to the seventh decimal place) computed by
dividing (i) the Pool Balance by (ii) the original
aggregate face amount of the Certificates of such Trust. The
Pool Factor for each Trust or for the Certificates issued by any
Trust as of any Distribution Date shall be computed after giving
effect to any payment of principal of the Equipment Notes or
payments with respect to other Trust Property held in such
Trust and the distribution thereof to be made on that date.
(Trust Supplements, Section 2.01) The Pool Factor for
each Trust will be 1.0000000 on the date of issuance of the
Certificates; thereafter, the Pool Factor for each Trust will
decline as described herein to
S-21
reflect reductions in the Pool Balance of such Trust. The amount
of a Certificateholders pro rata share of the Pool Balance
of a Trust can be determined by multiplying the par value of the
holders Certificate of such Trust by the Pool Factor for
such Trust as of the applicable Distribution Date. Notice of the
Pool Factor and the Pool Balance for each Trust will be mailed
to Certificateholders of such Trust on each Distribution Date.
(Trust Supplements, Section 3.01)
The following table sets forth the aggregate principal
amortization schedule for the Equipment Notes held in each Trust
and resulting expected Pool Factors with respect to such Trust.
The scheduled distribution of principal payments for any Trust
would be affected if any Equipment Notes held in such Trust are
redeemed or purchased or if a default in payment on such
Equipment Notes occurs. Accordingly, the aggregate principal
amortization schedule applicable to a Trust and the resulting
Pool Factors may differ from those set forth in the following
table.
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Class A
|
|
|
Class B
|
|
|
|
Scheduled
|
|
|
Expected
|
|
|
Scheduled
|
|
|
Expected
|
|
|
|
Principal
|
|
|
Pool
|
|
|
Principal
|
|
|
Pool
|
|
Date
|
|
Payments
|
|
|
Factor
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Payments
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|
Factor
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance Date
|
|
$
|
0.00
|
|
|
|
1.0000000
|
|
|
$
|
0.00
|
|
|
|
1.0000000
|
|
February 1, 2008
|
|
|
7,138,708.16
|
|
|
|
0.9826772
|
|
|
|
1,522,670.34
|
|
|
|
0.9826772
|
|
August 1, 2008
|
|
|
6,566,939.86
|
|
|
|
0.9667419
|
|
|
|
1,400,713.45
|
|
|
|
0.9667419
|
|
February 1, 2009
|
|
|
6,566,939.87
|
|
|
|
0.9508066
|
|
|
|
1,400,713.46
|
|
|
|
0.9508066
|
|
August 1, 2009
|
|
|
6,566,939.87
|
|
|
|
0.9348713
|
|
|
|
1,400,713.45
|
|
|
|
0.9348713
|
|
February 1, 2010
|
|
|
12,424,198.75
|
|
|
|
0.9047228
|
|
|
|
1,400,713.46
|
|
|
|
0.9189360
|
|
August 1, 2010
|
|
|
8,152,615.17
|
|
|
|
0.8849397
|
|
|
|
1,400,713.45
|
|
|
|
0.9030007
|
|
February 1, 2011
|
|
|
8,085,342.70
|
|
|
|
0.8653199
|
|
|
|
1,400,713.45
|
|
|
|
0.8870654
|
|
August 1, 2011
|
|
|
8,018,070.22
|
|
|
|
0.8458633
|
|
|
|
1,400,713.46
|
|
|
|
0.8711301
|
|
February 1, 2012
|
|
|
7,950,797.73
|
|
|
|
0.8265699
|
|
|
|
1,400,713.45
|
|
|
|
0.8551948
|
|
August 1, 2012
|
|
|
7,883,525.26
|
|
|
|
0.8074398
|
|
|
|
1,400,713.45
|
|
|
|
0.8392595
|
|
February 1, 2013
|
|
|
7,816,252.78
|
|
|
|
0.7884729
|
|
|
|
1,400,713.46
|
|
|
|
0.8233242
|
|
August 1, 2013
|
|
|
7,748,980.29
|
|
|
|
0.7696692
|
|
|
|
6,902,094.88
|
|
|
|
0.7448021
|
|
February 1, 2014
|
|
|
7,369,930.83
|
|
|
|
0.7517854
|
|
|
|
1,292,133.56
|
|
|
|
0.7301020
|
|
August 1, 2014
|
|
|
7,314,497.98
|
|
|
|
0.7340361
|
|
|
|
1,292,133.55
|
|
|
|
0.7154020
|
|
February 1, 2015
|
|
|
7,259,065.13
|
|
|
|
0.7164212
|
|
|
|
1,292,133.56
|
|
|
|
0.7007019
|
|
August 1, 2015
|
|
|
7,203,632.29
|
|
|
|
0.6989409
|
|
|
|
1,292,133.56
|
|
|
|
0.6860019
|
|
February 1, 2016
|
|
|
7,148,199.44
|
|
|
|
0.6815952
|
|
|
|
1,292,133.56
|
|
|
|
0.6713018
|
|
August 1, 2016
|
|
|
7,092,766.59
|
|
|
|
0.6643839
|
|
|
|
1,292,133.55
|
|
|
|
0.6566018
|
|
February 1, 2017
|
|
|
11,381,101.03
|
|
|
|
0.6367666
|
|
|
|
2,210,912.43
|
|
|
|
0.6314492
|
|
August 1, 2017
|
|
|
14,961,066.04
|
|
|
|
0.6004621
|
|
|
|
2,988,618.90
|
|
|
|
0.5974490
|
|
February 1, 2018
|
|
|
17,561,549.53
|
|
|
|
0.5578473
|
|
|
|
3,565,338.22
|
|
|
|
0.5568877
|
|
August 1, 2018
|
|
|
19,677,878.29
|
|
|
|
0.5100971
|
|
|
|
4,043,957.23
|
|
|
|
0.5108814
|
|
February 1, 2019
|
|
|
21,494,226.08
|
|
|
|
0.4579393
|
|
|
|
4,667,376.68
|
|
|
|
0.4577827
|
|
August 1, 2019
|
|
|
23,102,444.66
|
|
|
|
0.4018790
|
|
|
|
4,995,325.39
|
|
|
|
0.4009530
|
|
February 1, 2020
|
|
|
24,555,932.36
|
|
|
|
0.3422917
|
|
|
|
5,287,357.84
|
|
|
|
0.3408010
|
|
August 1, 2020
|
|
|
25,888,870.62
|
|
|
|
0.2794699
|
|
|
|
5,550,709.08
|
|
|
|
0.2776531
|
|
February 1, 2021
|
|
|
27,124,647.74
|
|
|
|
0.2136493
|
|
|
|
5,964,222.62
|
|
|
|
0.2098007
|
|
August 1, 2021
|
|
|
28,280,071.18
|
|
|
|
0.1450250
|
|
|
|
6,077,825.94
|
|
|
|
0.1406559
|
|
February 1, 2022
|
|
|
29,367,683.07
|
|
|
|
0.0737615
|
|
|
|
9,532,319.53
|
|
|
|
0.0322109
|
|
August 1, 2022
|
|
|
30,397,126.48
|
|
|
|
0.0000000
|
|
|
|
2,831,335.04
|
|
|
|
0.0000000
|
|
The Pool Factor and Pool Balance of each Trust will be
recomputed if there has been an early redemption, purchase, or
default in the payment of principal or interest in respect of
one or more of the Equipment Notes held in a Trust, as described
in Indenture Defaults and Certain Rights Upon an
Indenture Default and Description of the Equipment
NotesRedemption. In the event of any such
redemption, purchase, or default, the Pool Factors and the Pool
Balances of each Trust so affected will be recomputed after
giving effect thereto and notice thereof will be mailed to the
Certificateholders of such Trust promptly after the occurrence
of such event.
S-22
Reports to Certificateholders
On each Distribution Date, the applicable Trustee will include
with each distribution by it of a Scheduled Payment or Special
Payment to Certificateholders of the related Trust a statement
setting forth the following information (per $1,000 aggregate
principal amount of Certificate for such Trust, except as to the
amounts described in items (a) and (d) below):
(a) The aggregate amount of funds distributed on such
Distribution Date under the Pass Through Trust Agreement,
indicating the amount allocable to each source, including any
portion thereof paid by the Liquidity Provider.
(b) The amount of such distribution under the Pass Through
Trust Agreement allocable to principal and the amount allocable
to premium, if any.
(c) The amount of such distribution under the Pass Through
Trust Agreement allocable to interest.
(d) The Pool Balance and the Pool Factor for such Trust.
(Trust Supplements, Section 3.01(a))
So long as the Certificates are registered in the name of DTC or
its nominee, on the record date prior to each Distribution Date,
the applicable Trustee will request that DTC post on its
Internet bulletin board a securities position listing setting
forth the names of all DTC Participants reflected on DTCs
books as holding interests in the Certificates on such record
date. On each Distribution Date, the applicable Trustee will
mail to each such DTC Participant the statement described above
and will make available additional copies as requested by such
DTC Participant for forwarding to Certificate Owners.
(Trust Supplements, Section 3.01(a))
In addition, after the end of each calendar year, the applicable
Trustee will furnish to each Certificateholder of each Trust at
any time during the preceding calendar year a report containing
the sum of the amounts determined pursuant to clauses (a),
(b) and (c) above with respect to the Trust for such
calendar year or, in the event such person was a
Certificateholder during only a portion of such calendar year,
for the applicable portion of such calendar year, and such other
items as are readily available to such Trustee and which a
Certificateholder shall reasonably request as necessary for the
purpose of such Certificateholders preparation of its
U.S. federal income tax returns. (Trust Supplements,
Section 3.01(b)) Such report and such other items shall be
prepared on the basis of information supplied to the applicable
Trustee by the DTC Participants and shall be delivered by such
Trustee to such DTC Participants to be available for forwarding
by such DTC Participants to Certificate Owners in the manner
described above. (Trust Supplements, Section 3.01(b))
At such time, if any, as the Certificates are issued in the form
of definitive certificates, the applicable Trustee will prepare
and deliver the information described above to each
Certificateholder of record of each Trust as the name and period
of ownership of such Certificateholder appears on the records of
the registrar of the Certificates.
Each Trustee is required to provide promptly to
Certificateholders of the related Trust all material
non-confidential information received by such Trustee from
Southwest. (Trust Supplements, Section 3.01(d))
Indenture Defaults and Certain Rights Upon an Indenture
Default
Since the Equipment Notes issued under an Indenture will be held
in more than one Trust, a continuing event of default under such
Indenture (after giving effect to any applicable grace period
and notice requirement, an Indenture Default) would
affect the Equipment Notes held by each such Trust. There are no
cross-acceleration provisions in the Indentures and the only
cross-default provision in the Indentures is an event of default
under each Indenture which occurs if (x) all amounts owing
under any Equipment Note issued under any other Indenture are
not paid in full on or before the Final Payment Date, and
(y) any such failure shall continue unremedied for a period
of twenty (20) Business Days thereafter. Consequently,
prior to the triggering of the cross-default, events resulting
in an Indenture Default under any particular Indenture may or
may not result in an Indenture Default under any other Indenture.
If the same institution acts as Trustee of multiple Trusts, such
Trustee could be faced with a potential conflict of interest
upon an Indenture Default. In such event, each Trustee has
indicated that it would resign as Trustee of one or all such
Trusts, and a successor trustee would be appointed in accordance
with the terms of the applicable Pass Through
Trust Agreement. Wilmington Trust Company will be the
initial Trustee under each Trust.
S-23
Upon the occurrence and continuation of an Indenture Default
under an Indenture, the Controlling Party will direct the Loan
Trustee under such Indenture in the exercise of remedies
thereunder and may accelerate and sell all (but not less than
all) of the Equipment Notes issued under such Indenture or sell
the collateral under such Indenture to any person, subject to
certain limitations. See Description of the Intercreditor
AgreementIntercreditor RightsLimitation on Exercise
of Remedies. The proceeds of any such sale will be
distributed pursuant to the provisions of the Intercreditor
Agreement. Any such proceeds so distributed to any Trustee upon
any such sale shall be deposited in the applicable Special
Payments Account and shall be distributed to the
Certificateholders of the applicable Trust on a Special
Distribution Date. (Trust Supplements, Sections 3.02
and 3.03) The market for Equipment Notes at the time of the
existence of an Indenture Default may be very limited and there
can be no assurance as to the price at which they could be sold.
If any such Equipment Notes are sold for less than their
outstanding principal amount, certain Certificateholders will
receive a smaller amount of principal distributions under the
relevant Indenture than anticipated and will not have any claim
for the shortfall against Southwest, the Liquidity Provider or
any Trustee.
Any amount, other than Scheduled Payments received on a Regular
Distribution Date or within five days thereafter, distributed to
the Trustee of any Trust by the Subordination Agent on account
of any Equipment Note or Collateral under (and as defined in)
any Indenture held in such Trust following an Indenture Default
will be deposited in the Special Payments Account for such Trust
and will be distributed to the Certificateholders of such Trust
on a Special Distribution Date. (Trust Supplements,
Sections 3.02 and 3.03) Any funds representing payments
received with respect to any defaulted Equipment Notes, or the
proceeds from the sale of any Equipment Notes, held by the
Trustee in the Special Payments Account for such Trust will, to
the extent practicable, be invested and reinvested by such
Trustee in certain permitted investments pending the
distribution of such funds on a Special Distribution Date.
(Section 4.04) Such permitted investments are defined as
obligations of the United States or agencies or
instrumentalities thereof for the payment of which the full
faith and credit of the United States is pledged and which
mature in not more than 60 days or such lesser time as is
required for the distribution of any such funds on a Special
Distribution Date. (Section 1.01)
Each Pass Through Trust Agreement provides that the Trustee
of the related Trust will, within 90 days after the
occurrence of any default known to the Trustee, give to the
Certificateholders of such Trust notice, transmitted by mail, of
such uncured or unwaived default with respect to such Trust
known to it, provided that, except in the case of default
in a payment of principal, premium, if any, or interest on any
of the Equipment Notes held in such Trust, the applicable
Trustee will be protected in withholding such notice if it in
good faith determines that the withholding of such notice is in
the interests of such Certificateholders. (Section 7.02)
The term default as used in this paragraph only with
respect to any Trust means the occurrence of an Indenture
Default under any Indenture pursuant to which Equipment Notes
held by such Trust were issued, as described above, except that
in determining whether any such Indenture Default has occurred,
any grace period or notice in connection therewith will be
disregarded.
Each Pass Through Trust Agreement contains a provision
entitling the Trustee of the related Trust, subject to the duty
of such Trustee during a default to act with the required
standard of care, to be offered reasonable security or indemnity
by the holders of the Certificates of such Trust before
proceeding to exercise any right or power under such Pass
Through Trust Agreement or the Intercreditor Agreement at
the request of such Certificateholders. (Section 7.03(e))
Subject to certain qualifications set forth in each Pass Through
Trust Agreement and to the Intercreditor Agreement, the
Certificateholders of each Trust holding Certificates evidencing
fractional undivided interests aggregating not less than a
majority in interest in such Trust shall have the right to
direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee with respect to such
Trust or pursuant to the terms of the Intercreditor Agreement,
or exercising any trust or power conferred on such Trustee under
such Pass Through Trust Agreement or the Intercreditor
Agreement, including any right of such Trustee as Controlling
Party under the Intercreditor Agreement or as holder of the
Equipment Notes. (Section 6.04)
In certain cases, the holders of the Certificates of a Trust
evidencing fractional undivided interests aggregating not less
than a majority in interest of such Trust may on behalf of the
holders of all the Certificates of such Trust waive any past
event of default under such Trust (i.e., any
Indenture Default under any Indenture pursuant to which
Equipment Notes held by such Trust were issued) and its
consequences or, if the Trustee of such Trust is the
S-24
Controlling Party, may direct the Trustee to instruct the
applicable Loan Trustee to waive any past Indenture Default and
its consequences, except (i) a default in the deposit of
any Scheduled Payment or Special Payment or in the distribution
thereof, (ii) a default in payment of the principal,
premium, if any, or interest with respect to any of the
Equipment Notes and (iii) a default in respect of any
covenant or provision of the Pass Through Trust Agreement
that cannot be modified or amended without the consent of each
Certificateholder of such Trust affected thereby.
(Section 6.05) Each Indenture will provide that, with
certain exceptions, the holders of the majority in aggregate
unpaid principal amount of the Equipment Notes issued thereunder
may on behalf of all such holders waive any past default or
Indenture Default thereunder. (Indentures, Section 5.06)
Notwithstanding such provisions of the Indentures, pursuant to
the Intercreditor Agreement only the Controlling Party will be
entitled to waive any such past default or Indenture Default
(except with respect to an Indenture under which Equipment Notes
have been purchased after the occurrence of an Equipment Note
Buyout Event). See Description of the Intercreditor
AgreementIntercreditor RightsControlling Party.
Purchase Rights of Certificateholders
Upon the occurrence and during the continuation of a Certificate
Buyout Event, with 15 days written notice to the
Class A Trustee and each other Class B
Certificateholder, each of the Class B Certificateholders
will have the right to purchase all but not less than all of the
Class A Certificates on the third Business Day next
following the expiry of such
15-day
notice period.
If any Additional Certificates are issued, the holders of
Additional Certificates will have the right to purchase all of
the Class A and Class B Certificates and, if
Refinancing Certificates are issued, holders of such Refinancing
Certificates will have the same right to purchase Certificates
as the Class that they refinanced. See Possible Issuance
of Additional Certificates and Refinancing of Certificates.
In each case, the purchase price will be equal to the Pool
Balance of the relevant Class or Classes of Certificates plus
accrued and unpaid interest thereon to the date of purchase,
without premium, but including any other amounts then due and
payable to the Certificateholders of such Class or Classes. Such
purchase right may be exercised by any Certificateholder of the
Class or Classes entitled to such right. In each case, if prior
to the end of the
15-day
notice period, any other Certificateholder of the same Class
notifies the purchasing Certificateholder that the other
Certificateholder wants to participate in such purchase, then
such other Certificateholder may join with the purchasing
Certificateholder to purchase the Certificates pro rata based on
the interest in the Trust held by each Certificateholder. If
Southwest or any of its affiliates is a Certificateholder, it
will not have the purchase rights described above.
(Trust Supplements, Section 4.01)
A Certificate Buyout Event means that a Southwest
Bankruptcy Event has occurred and is continuing and the
following events have occurred: (A) (i) the
60-day
period specified in Section 1110(a)(2)(A) of the
U.S. Bankruptcy Code (the
60-Day
Period) has expired and (ii) Southwest has not
entered into one or more agreements under
Section 1110(a)(2)(A) of the U.S. Bankruptcy Code to
perform all of its obligations under all of the Indentures or,
if it has entered into such agreements, has at any time failed
to cure any default under any of the Indentures in accordance
with Section 1110(a)(2)(B) of the U.S. Bankruptcy
Code; or (B) if prior to the expiry of the
60-Day
Period, Southwest shall have abandoned any Aircraft.
A Pass Through Certificate Event of Default (a PTC Event
of Default) under each Pass Through Trust Agreement
means the failure to pay:
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The outstanding Pool Balance of the applicable Class of
Certificates within ten Business Days of the Final Maturity Date
for such Class.
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Interest due on such Class of Certificates within ten Business
Days of any Distribution Date (unless, in the case of the
Class A Certificates, the Subordination Agent shall have
made Interest Drawings, or withdrawals from the Cash Collateral
Account for such Class of Certificates, with respect thereto in
an aggregate amount sufficient to pay such interest and shall
have distributed such amount to the Trustee entitled thereto).
(Section 1.01)
|
S-25
Any failure to make expected principal distributions with
respect to any Class of Certificates on any Regular Distribution
Date (other than the Final Maturity Date) will not constitute a
PTC Event of Default with respect to such Certificates. A PTC
Event of Default with respect to the most senior outstanding
Class of Certificates resulting from an Indenture Default under
all Indentures will constitute a Triggering Event.
Merger, Consolidation and Transfer of Assets
Southwest will be prohibited from consolidating with or merging
into any other entity or transferring substantially all of its
assets as an entirety to any other entity unless:
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The surviving successor or transferee entity shall be a
corporation, limited partnership, limited liability company or
other entity validly existing under the laws of the United
States or any state thereof or the District of Columbia.
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The surviving successor or transferee entity shall be a
citizen of the United States (as defined in
Title 49 of the United States Code relating to aviation
(the Transportation Code)) holding an air carrier
operating certificate issued pursuant to Chapter 447 of
Title 49, United States Code, if, and so long as, such
status is a condition of entitlement to the benefits of
Section 1110.
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The surviving successor or transferee entity shall expressly
assume all of the obligations of Southwest contained in the
Basic Agreement and any Trust Supplement, the Participation
Agreements, the Indentures and any other operative documents.
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Southwest shall have delivered a certificate and an opinion or
opinions of counsel indicating that such transaction, in effect,
complies with such conditions.
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In addition, after giving effect to such transaction, no
Indenture Default shall have occurred and be continuing.
(Section 5.02; Indentures, Section 4.07)
The Basic Agreement, the Trust Supplements, the Indentures
and the Participation Agreements will not contain any covenants
or provisions that may afford the applicable Trustee or
Certificateholders protection in the event of a highly leveraged
transaction, including transactions effected by management or
affiliates, which may or may not result in a change in control
of Southwest.
Modifications
of the Pass Through Trust Agreements and Certain Other
Agreements
Each Pass Through Trust Agreement contains provisions
permitting, at the request of the Company, the execution of
amendments or supplements to such Pass Through
Trust Agreement or, if applicable, to the Intercreditor
Agreement, the Participation Agreements or the Liquidity
Facility, without the consent of the holders of any of the
Certificates of such Trust:
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To evidence the succession of another entity to Southwest and
the assumption by such successor of Southwests obligations
under such Pass Through Trust Agreement and the
Participation Agreements.
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To add to the covenants of Southwest for the benefit of holders
of such Certificates or to surrender any right or power
conferred upon Southwest in such Pass Through
Trust Agreement, the Intercreditor Agreement, the
Participation Agreements or the Liquidity Facility.
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To correct or supplement any provision of such Pass Through
Trust Agreement, the Intercreditor Agreement, the Participation
Agreements or the Liquidity Facility which may be defective or
inconsistent with any other provision in such Pass Through
Trust Agreement, the Intercreditor Agreement, the
Participation Agreements or the Liquidity Facility, as
applicable, or to cure any ambiguity or to modify any other
provision with respect to matters or questions arising under
such Pass Through Trust Agreement, the Intercreditor
Agreement, the Participation Agreements or the Liquidity
Facility, provided that such action shall not materially
adversely affect the interests of the holders of such
Certificates; to correct any mistake in such Pass Through Trust
Agreement, the Intercreditor Agreement, the Participation
Agreements or the Liquidity Facility; or, as provided in the
Intercreditor Agreement, to give effect to or provide for a
Replacement Facility.
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To comply with any requirement of the Commission, any applicable
law, rules or regulations of any exchange or quotation system on
which the Certificates are listed, or any regulatory body.
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To modify, eliminate or add to the provisions of such Pass
Through Trust Agreement, the Intercreditor Agreement, the
Participation Agreements or the Liquidity Facility to such
extent as shall be necessary to continue the qualification of
such Pass Through Trust Agreement (including any
supplemental agreement) under the Trust Indenture Act of
1939, as amended (the Trust Indenture Act), or
any similar federal statute enacted after the execution of such
Pass Through Trust Agreement, and to add to such Pass
Through Trust Agreement, the Intercreditor Agreement, the
Participation Agreements or the Liquidity Facility such other
provisions as may be expressly permitted by the
Trust Indenture Act.
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To evidence and provide for the acceptance of appointment under
such Pass Through Trust Agreement, the Intercreditor
Agreement, the Participation Agreements or the Liquidity
Facility by a successor Trustee and to add to or change any of
the provisions of such Pass Through Trust Agreement, the
Intercreditor Agreement, the Participation Agreements or the
Liquidity Facility as shall be necessary to provide for or
facilitate the administration of the Trusts under the Basic
Agreement by more than one Trustee.
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To provide for the issuance of Additional Certificates or
Refinancing Certificates, subject to certain terms and
conditions. See Possible Issuance of Additional
Certificates and Refinancing of Certificates.
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In each case, such modification or supplement may not adversely
affect the status of the Trust as a grantor trust under Subpart
E, Part I of Subchapter J of Chapter 1 of Subtitle A
of the Code, for U.S. federal income tax purposes.
(Section 9.01; Trust Supplements, Section 6.02)
Each Pass Through Trust Agreement also contains provisions
permitting the execution, with the consent of the holders of the
Certificates of the related Trust evidencing fractional
undivided interests aggregating not less than a majority in
interest of such Trust, of amendments or supplements adding any
provisions to or changing or eliminating any of the provisions
of such Pass Through Trust Agreement, the Intercreditor
Agreement, the Participation Agreements or the Liquidity
Facility to the extent applicable to such Certificateholders or
of modifying the rights and obligations of such
Certificateholders under such Pass Through Trust Agreement,
the Intercreditor Agreement, the Participation Agreements or the
Liquidity Facility. No such amendment or supplement may, without
the consent of the holder of each Certificate so affected
thereby:
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Reduce in any manner the amount of, or delay the timing of, any
receipt by the Trustee of payments with respect to the Equipment
Notes held in such Trust or distributions in respect of any
Certificate related to such Trust, or change the date or place
of any payment in respect of any Certificate, or make
distributions payable in coin or currency other than that
provided for in such Certificates, or impair the right of any
Certificateholder of such Trust to institute suit for the
enforcement of any such payment when due.
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Permit the disposition of any Equipment Note held in such Trust,
except as provided in such Pass Through Trust Agreement, or
otherwise deprive such Certificateholder of the benefit of the
ownership of the applicable Equipment Notes.
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Alter the priority of distributions specified in the
Intercreditor Agreement in a manner materially adverse to such
Certificateholders.
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Reduce the percentage of the aggregate fractional undivided
interests of the Trust provided for in such Pass Through
Trust Agreement, the consent of the holders of which is
required for any such supplemental trust agreement or for any
waiver provided for in such Pass Through Trust Agreement.
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Modify any of the provisions relating to the rights of the
Certificateholders in respect of the waiver of events of default
or receipt of payment.
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Adversely affect the status of any Trust as a grantor trust
under Subpart E, Part I of Subchapter J of Chapter 1
of Subtitle A of the Code for U.S. federal income tax
purposes. (Section 9.02; Trust Supplements,
Section 6.03)
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In the event that a Trustee, as holder (or beneficial owner
through the Subordination Agent) of any Equipment Note in trust
for the benefit of the Certificateholders of the relevant Trust
or as Controlling Party under the
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Intercreditor Agreement, receives (directly or indirectly
through the Subordination Agent) a request for a consent to any
amendment, modification, waiver or supplement under any
Indenture, any Participation Agreement, any Equipment Note or
any other related document, such Trustee shall forthwith send a
notice of such proposed amendment, modification, waiver or
supplement to each Certificateholder of the relevant Trust as of
the date of such notice. Such Trustee shall request from the
Certificateholders a direction as to:
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Whether or not to take or refrain from taking (or direct the
Subordination Agent to take or refrain from taking) any action
which a holder of such Equipment Note or the Controlling Party
has the option to direct.
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Whether or not to give or execute (or direct the Subordination
Agent to give or execute) any waivers, consents, amendments,
modifications or supplements as a holder of such Equipment Note
or as Controlling Party.
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How to vote (or direct the Subordination Agent to vote) any
Equipment Note if a vote has been called for with respect
thereto.
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Provided such a request for Certificateholder direction shall
have been made, in directing any action or casting any vote or
giving any consent as the holder of any Equipment Note (or in
directing the Subordination Agent in any of the foregoing):
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Other than as Controlling Party, such Trustee shall vote for or
give consent to any such action with respect to such Equipment
Note in the same proportion as that of (x) the aggregate
face amount of all Certificates actually voted in favor of or
for giving consent to such action by such direction of
Certificateholders to (y) the aggregate face amount of all
outstanding Certificates of the relevant Trust.
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As the Controlling Party, such Trustee shall vote as directed in
such Certificateholder direction by the Certificateholders
evidencing fractional undivided interests aggregating not less
than a majority in interest in the relevant Trust.
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For purposes of the immediately preceding paragraph, a
Certificate shall have been actually voted if the
Certificateholder has delivered to the applicable Trustee an
instrument evidencing such Certificateholders consent to
such direction prior to one Business Day before such Trustee
directs such action or casts such vote or gives such consent.
Notwithstanding the foregoing, but subject to certain rights of
the Certificateholders under the relevant Pass Through
Trust Agreement and subject to the Intercreditor Agreement,
a Trustee may, in its own discretion and at its own direction,
consent and notify the relevant Loan Trustee of such consent (or
direct the Subordination Agent to consent and notify the
relevant Loan Trustee of such consent) to any amendment,
modification, waiver or supplement under the relevant Indenture,
Participation Agreement, any relevant Equipment Note or any
other related document, if an Indenture Default under any
Indenture shall have occurred and be continuing, or if such
amendment, modification, waiver or supplement will not
materially adversely affect the interests of the
Certificateholders. (Section 10.01)
In determining whether the Certificateholders of the requisite
fractional undivided interests of Certificates of any Class have
given any direction under a Pass Through Trust Agreement,
Certificates owned by Southwest or any of its affiliates will be
disregarded and deemed not to be outstanding for purposes of any
such determination. Notwithstanding the foregoing, (i) if
any such person owns 100% of the Certificates of any Class, such
Certificates shall not be so disregarded, and (ii) if any
amount of Certificates of any Class so owned by any such person
have been pledged in good faith, such Certificates shall not be
disregarded if the pledgee establishes to the satisfaction of
the applicable Trustee the pledgees right so to act with
respect to such Certificates and that the pledgee is not
Southwest or an affiliate of Southwest. (Section 1.04(c))
Termination of the Trusts
The obligations of Southwest and the applicable Trustee with
respect to a Trust will terminate upon the distribution to
Certificateholders of such Trust of all amounts required to be
distributed to them pursuant to the applicable Pass Through
Trust Agreement and the disposition of all property held in
such Trust. The applicable Trustee will send to each
Certificateholder of such Trust notice of the termination of
such Trust, the amount of the proposed final payment and the
proposed date for the distribution of such final payment for
such Trust. The final
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distribution to any Certificateholder of such Trust will be made
only upon surrender of such Certificateholders
Certificates at the office or agency of the applicable Trustee
specified in such notice of termination.
(Trust Supplements, Section 7.01)
The Trustee for each Trust will be Wilmington
Trust Company. The Trustees address is Wilmington
Trust Company, Rodney Square North, 1100 North Market
Street, Wilmington, Delaware
19890-0001,
Attention: Corporate Trust Administration.
Book-Entry; Delivery and Form
General
Upon issuance, each Class of Certificates will be represented by
one or more fully registered global certificates. Each global
certificate will be deposited with, or on behalf of, The
Depository Trust Company (DTC) and registered
in the name of Cede & Co. (Cede), the
nominee of DTC. DTC was created to hold securities for its
participants (DTC Participants) and facilitate the
clearance and settlement of securities transactions between DTC
Participants through electronic book-entry changes in accounts
of the DTC Participants, thereby eliminating the need for
physical movement of certificates. DTC Participants include
securities brokers and dealers, banks, trust companies and
clearing corporations and certain other organizations. Indirect
access to the DTC system is available to others such as banks,
brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a DTC Participant, either
directly or indirectly (Indirect DTC Participants).
Interests in a global certificate may also be held through the
Euroclear System and Clearstream, Luxembourg, as DTC
Participants.
So long as such book-entry procedures are applicable, no person
acquiring an interest in such Certificates (Certificate
Owner) will be entitled to receive a certificate
representing such persons interest in such Certificates.
Unless and until definitive Certificates are issued under the
limited circumstances described below under Physical
Certificates, all references to actions by
Certificateholders shall refer to actions taken by DTC upon
instructions from DTC Participants, and all references herein to
distributions, notices, reports and statements to
Certificateholders shall refer, as the case may be, to
distributions, notices, reports and statements to DTC or Cede,
as the registered holder of such Certificates, or to DTC
Participants for distribution to Certificate Owners in
accordance with DTC procedures.
DTC is a limited purpose trust company organized under the laws
of the State of New York, a member of the Federal Reserve
System, a clearing corporation within the meaning of
the New York Uniform Commercial Code and clearing
agency registered pursuant to Section 17A of the
Securities Exchange Act of 1934.
Under the New York Uniform Commercial Code, a clearing
corporation is defined as:
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a person that is registered as a clearing agency
under the federal securities laws;
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a federal reserve bank; or
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any other person that provides clearance or settlement services
with respect to financial assets that would require it to
register as a clearing agency under the federal securities laws
but for an exclusion or exemption from the registration
requirement, if its activities as a clearing corporation,
including promulgation of rules, are subject to regulation by a
federal or state governmental authority.
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A clearing agency is an organization established for
the execution of trades by transferring funds, assigning
deliveries and guaranteeing the performance of the obligations
of parties to trades.
Under the rules, regulations and procedures creating and
affecting DTC and its operations, DTC is required to make
book-entry transfers of the Certificates among DTC Participants
on whose behalf it acts with respect to the Certificates and to
receive and transmit distributions of principal, premium, if
any, and interest with respect to the Certificates. DTC
Participants and Indirect DTC Participants with which
Certificate Owners have accounts similarly are required to make
book-entry transfers and receive and transmit the payments on
behalf of their
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respective customers. Certificate Owners that are not DTC
Participants or Indirect DTC Participants but desire to
purchase, sell or otherwise transfer ownership of, or other
interests in, the Certificates may do so only through DTC
Participants and Indirect DTC Participants. In addition,
Certificate Owners will receive all distributions of principal,
premium, if any, and interest from the Trustees through DTC
Participants or Indirect DTC Participants, as the case may be.
Under a book-entry format, Certificate Owners may experience
some delay in their receipt of payments, because payments with
respect to the Certificates will be forwarded by the Trustees to
Cede, as nominee for DTC. DTC will forward payments in
same-day
funds to each DTC Participant who is credited with ownership of
the Certificates in an amount proportionate to the principal
amount of that DTC Participants holdings of beneficial
interests in the Certificates, as shown on the records of DTC or
its nominee. Each such DTC Participant will forward payments to
its Indirect DTC Participants in accordance with standing
instructions and customary industry practices. DTC Participants
and Indirect DTC Participants will be responsible for forwarding
distributions to Certificate Owners for whom they act.
Accordingly, although Certificate Owners will not possess
physical Certificates, DTCs rules provide a mechanism by
which Certificate Owners will receive payments on the
Certificates and will be able to transfer their interests.
Unless and until physical Certificates are issued under the
limited circumstances described under Physical
Certificates below, the only physical Certificateholder
will be Cede, as nominee of DTC. Certificate Owners will not be
recognized by the Trustees as registered owners of Certificates
under the applicable Pass Through Trust Agreement.
Certificate Owners will be permitted to exercise their rights
under the applicable Pass Through Trust Agreement only
indirectly through DTC. DTC will take any action permitted to be
taken by a Certificateholder under the applicable Pass Through
Trust Agreement only at the direction of one or more DTC
Participants to whose accounts with DTC the Certificates are
credited. In the event any action requires approval by
Certificateholders of a certain percentage of the beneficial
interests in a Trust, DTC will take action only at the direction
of and on behalf of DTC Participants whose holdings include
undivided interests that satisfy the required percentage. DTC
may take conflicting actions with respect to other undivided
interests to the extent that the actions are taken on behalf of
DTC Participants whose holdings include those undivided
interests. DTC will convey notices and other communications to
DTC Participants, and DTC Participants will convey notices and
other communications to Indirect DTC Participants in accordance
with arrangements among them. Arrangements among DTC and its
direct and indirect participants are subject to any statutory or
regulatory requirements as may be in effect from time to time.
DTCs rules applicable to itself and DTC Participants are
on file with the Commission.
A Certificate Owners ability to pledge its Certificates to
persons or entities that do not participate in the DTC system,
or otherwise to act with respect to its Certificates, may be
limited due to the lack of a physical Certificate to evidence
ownership of the Certificates, and because DTC can only act on
behalf of DTC Participants, who in turn act on behalf of
Indirect DTC Participants.
Neither Southwest nor the Trustees will have any liability for
any aspect of the records relating to or payments made on
account of beneficial ownership interests in the Certificates
held by Cede, as nominee for DTC, for maintaining, supervising
or reviewing any records relating to the beneficial ownership
interests or for the performance by DTC, any DTC Participant or
any Indirect DTC Participant of their respective obligations
under the rules and procedures governing their obligations.
As long as the Certificates of any Trust are registered in the
name of DTC or its nominee, Southwest will make all payments to
the Loan Trustee under the applicable Indenture in immediately
available funds. The applicable Trustee will pass through to DTC
in immediately available funds all payments received from
Southwest, including the final distribution of principal with
respect to the Certificates of such Trust.
Any Certificates registered in the name of DTC or its nominee
will trade in DTCs
Same-Day
Funds Settlement System until maturity. DTC will require
secondary market trading activity in the Certificates to settle
in immediately available funds. No assurance can be given as to
the effect, if any, of settlement in
same-day
funds on trading activity in the Certificates.
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Physical
Certificates
Physical Certificates will be issued in paper form to
Certificateholders or their nominees, rather than to DTC or its
nominee, only if:
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Southwest advises the applicable Trustee in writing that DTC is
no longer willing or able to discharge properly its
responsibilities as depository with respect to the Certificates
and such Trustee or Southwest is unable to locate a qualified
successor;
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Southwest elects to terminate the book-entry system through
DTC; or
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after the occurrence of a PTC Event of Default, Certificate
Owners owning at least a majority in interest in a Trust advise
the applicable Trustee, Southwest and DTC through DTC
Participants that the continuation of a book-entry system
through DTC or a successor to DTC is no longer in the
Certificate Owners best interest.
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Upon the occurrence of any of the events described in the three
subparagraphs above, the applicable Trustee will notify all
applicable Certificate Owners through DTC of the availability of
physical Certificates. Upon surrender by DTC of the global
Certificates and receipt of instructions for re-registration,
the applicable Trustee will reissue the Certificates as physical
Certificates to the applicable Certificate Owners.
(Section 3.05(d))
In the case of the physical Certificates that are issued, the
applicable Trustee or a paying agent will make distributions of
principal, premium, if any, and interest with respect to such
Certificates directly to holders in whose names the physical
Certificates were registered at the close of business on the
applicable record date. Except for the final payment to be made
with respect to a Certificate, the applicable Trustee or a
paying agent will make distributions by check mailed to the
addresses of the registered holders as they appear on the
register maintained by such Trustee. The applicable Trustee or a
paying agent will make the final payment with respect to any
Certificate only upon presentation and surrender of the
applicable Certificate at the office or agency specified in the
notice of final distribution to Certificateholders.
Physical Certificates will be freely transferable and
exchangeable at the office of the Trustee upon compliance with
the requirements set forth in the applicable Pass Through
Trust Agreement. Neither the Trustee nor any transfer or
exchange agent will impose a service charge for any registration
of transfer or exchange. However, the Trustee or transfer or
exchange agent will require payment of a sum sufficient to cover
any tax or other governmental charge attributable to a transfer
or exchange. (Section 3.04)
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DESCRIPTION OF THE LIQUIDITY FACILITY FOR CLASS A
CERTIFICATES
The following summary describes the material terms of the
Liquidity Facility and certain provisions of the Intercreditor
Agreement relating to the Liquidity Facility. The summary does
not purport to be complete and is qualified in its entirety by
reference to all of the provisions of the Liquidity Facility and
the Intercreditor Agreement, each of which will be filed as an
exhibit to a Current Report on
Form 8-K
to be filed by Southwest with the Commission.
BNP Paribas, acting through its New York branch (the
Liquidity Provider), will enter into a revolving
credit agreement (the Liquidity Facility) with the
Subordination Agent with respect to the Class A Trust. On
any Regular Distribution Date, if, after giving effect to the
subordination provisions of the Intercreditor Agreement, the
Subordination Agent does not have sufficient funds for the
payment of interest on the Class A Certificates, the
Liquidity Provider will make an advance (an Interest
Drawing) in the amount needed to fund such interest
shortfall up to the Maximum Available Commitment. The maximum
amount of Interest Drawings available under the Liquidity
Facility is expected to provide an amount sufficient to pay
interest on Class A Certificates on up to three consecutive
semiannual Regular Distribution Dates (without regard to any
expected future payments of principal on such Certificates) at
the interest rate shown on the cover page of this Prospectus
Supplement for such Certificates (the Stated Interest
Rate). If interest payment defaults occur which exceed the
amount covered by and available under the Liquidity Facility for
the Class A Trust, the Certificateholders of such Trust
will bear their allocable share of the deficiencies to the
extent that there are no other sources of funds. The initial
Liquidity Provider may be replaced by one or more other entities
under certain circumstances. The Class B Certificates will
not have the benefit of a liquidity facility.
The initial aggregate amount available under the Liquidity
Facility for the Class A Trust will be
$ .
Except as otherwise provided below, the Liquidity Facility for
the Class A Trust will enable the Subordination Agent to
make Interest Drawings thereunder promptly on or after any
Regular Distribution Date if, after giving effect to the
subordination provisions of the Intercreditor Agreement, there
are insufficient funds available to the Subordination Agent to
pay interest on the Class A Certificates at the Stated
Interest Rate for such Trust; provided, however, that the
maximum amount available to be drawn under the Liquidity
Facility with respect to the Class A Trust on any Regular
Distribution Date to fund any shortfall of interest on
Certificates of such Trust will not exceed the then Maximum
Available Commitment under the Liquidity Facility. The
Maximum Available Commitment at any time under the
Liquidity Facility is an amount equal to the then Maximum
Commitment of the Liquidity Facility less the aggregate amount
of each Interest Drawing outstanding under the Liquidity
Facility at such time, provided that following a
Downgrade Drawing, a Non-Extension Drawing, Special Termination
Drawing or a Final Drawing under the Liquidity Facility, the
Maximum Available Commitment thereunder shall be zero.
Maximum Commitment for the Liquidity Facility for
the Class A Trust means initially
$ , as the same may be reduced from
time to time as described below.
The Liquidity Facility does not provide for drawings thereunder
to pay for principal of or premium on the Class A
Certificates or any interest on the Class A Certificates in
excess of the Stated Interest Rate for such Class or more than
three semiannual installments of interest thereon or principal
of or interest or premium on the Certificates of any other
Class. (Liquidity Facility, Section 2.02; Intercreditor
Agreement, Section 3.5).
Each payment by the Liquidity Provider reduces by the same
amount the Maximum Available Commitment under the Liquidity
Facility, subject to reinstatement as described below. With
respect to any Interest Drawing, upon reimbursement of the
Liquidity Provider in full or in part for the amount of such
Interest Drawing plus interest thereon, the Maximum Available
Commitment under the Liquidity Facility will be reinstated by an
amount equal to the amount of such Interest Drawing so
reimbursed up to an amount not to exceed the Maximum Commitment
of the Liquidity Facility. However, the Liquidity Facility will
not be so reinstated at any time if (i) a Liquidity Event
of Default shall have occurred and be continuing and less than
65% of the then aggregate outstanding principal amount
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of all Equipment Notes (other than any Additional Equipment
Notes issued under any Indenture) are Performing Equipment Notes
or (ii) a Downgrade Drawing, a Non-Extension Drawing,
Special Termination Drawing or a Final Drawing shall have been
made or an Interest Drawing shall have been converted into a
Final Advance. With respect to any other drawings under the
Liquidity Facility, amounts available to be drawn thereunder are
not subject to reinstatement. On the first Regular Distribution
Date and on each date on which the Pool Balance of the
Class A Trust shall have been reduced by payments made to
the Class A Certificateholders pursuant to the
Intercreditor Agreement, the Maximum Commitment of the Liquidity
Facility will be automatically reduced from time to time to an
amount equal to the then Required Amount. (Liquidity Facility,
Section 2.02(a), Section 2.04(a); Intercreditor Agreement,
Section 3.5(j))
Required Amount means, in relation to the Liquidity
Facility for any day, the sum of the aggregate amount of
interest, calculated at the rate per annum equal to the Stated
Interest Rate for the Class A Certificates, that would be
payable on Class A Certificates on each of the three
successive Regular Distribution Dates immediately following such
day or, if such day is a Regular Distribution Date, on such day
and the succeeding two Regular Distribution Dates, in each case
calculated on the basis of the Pool Balance of the Class A
Certificates on such day and without regard to expected future
payments of principal on the Class A Certificates.
Performing Equipment Note means an Equipment Note
with respect to which no payment default has occurred and is
continuing (without giving effect to any acceleration);
provided that in the event of a bankruptcy proceeding
under the U.S. Bankruptcy Code in which Southwest is a
debtor any payment default existing during the
60-day
period under Section 1110(a)(2)(A) of the
U.S. Bankruptcy Code (or such longer period as may apply
under Section 1110(b) of the U.S. Bankruptcy Code or
as may apply for the cure of such payment default under
Section 1110(a)(2)(B) of the U.S. Bankruptcy Code)
shall not be taken into consideration until the expiration of
the applicable period.
If at any time the short-term rating or short-term issuer credit
rating, as the case may be, of the Liquidity Provider then
issued by either Rating Agency is lower than the Liquidity
Threshold Rating, and the Liquidity Facility is not replaced
with a Replacement Facility within ten days (or 45 days if
Standard and Poors downgrades the Liquidity
Providers ratings from
A-1+ to
A-1) after
notice of such downgrading and as otherwise provided in the
Intercreditor Agreement, the Liquidity Facility will be drawn in
full up to the then Maximum Available Commitment thereunder (the
Downgrade Drawing). The proceeds of a Downgrade
Drawing will be deposited into a cash collateral account (the
Cash Collateral Account) for the Class A Trust
and used for the same purposes and under the same circumstances
and subject to the same conditions as cash payments of Interest
Drawings under the Liquidity Facility would be used. (Liquidity
Facility, Section 2.02(c); Intercreditor Agreement,
Section 3.5(c)) If a qualified Replacement Facility is
subsequently provided, the balance of the Cash Collateral
Account will be repaid to the replaced Liquidity Provider.
A Replacement Facility for the Liquidity Facility
means an irrevocable liquidity facility (or liquidity
facilities) in substantially the form of the replaced Liquidity
Facility, including reinstatement provisions, or in such other
form (which may include a letter of credit) as shall permit the
Rating Agencies to confirm in writing their respective ratings
then in effect for the Class A Certificates (before
downgrading of such ratings, if any, as a result of the
downgrading of the replaced Liquidity Provider), in a face
amount (or in an aggregate face amount) equal to the then
Required Amount for the replaced Liquidity Facility and issued
by a person (or persons) having a short-term rating or
short-term issuer credit rating, as the case may be, issued by
both Rating Agencies which is equal to or higher than the
Liquidity Threshold Rating. (Intercreditor Agreement,
Section 1.1) The provider of any Replacement Facility will
have the same rights (including, without limitation, priority
distribution rights and rights as Controlling Party)
under the Intercreditor Agreement as the Liquidity Provider
being replaced.
Liquidity Threshold Rating means the short-term
rating of
P-1 by
Moodys and the short-term issuer credit rating of
A-1+ by
Standard & Poors.
The Liquidity Facility provides that the Liquidity
Providers obligations thereunder will expire upon the
making of a Downgrade Drawing, Non-Extension Drawing, Special
Termination Drawing or Final Drawing or on the earliest of:
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364 days after the Issuance Date (counting from, and
including, the Issuance Date).
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S-33
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The date on which the Subordination Agent delivers to the
Liquidity Provider a certification that all of the Class A
Certificates have been paid in full.
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The date on which the Subordination Agent delivers to the
Liquidity Provider a certification that a Replacement Facility
has been substituted for the Liquidity Facility.
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The fifth Business Day following receipt by the Subordination
Agent of a Final Termination Notice or Special Termination
Notice from the Liquidity Provider (see Liquidity
Events of Default).
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The date on which no amount is or may (by reason of
reinstatement) become available for drawing under the Liquidity
Facility. (Liquidity Facility, Section 1.01)
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The Liquidity Facility provides that it may be extended for
additional
364-day
periods in the discretion of the Liquidity Provider. The
Intercreditor Agreement will provide for the replacement of the
Liquidity Facility if the Liquidity Facility is scheduled to
expire earlier than 15 days after the Final Maturity Date
for the Class A Certificates and the Liquidity Facility is
not extended at least 25 days prior to its then scheduled
expiration date. If the Liquidity Facility is not so extended or
replaced by the 25th day prior to its then scheduled
expiration date, the Liquidity Facility will be drawn in full up
to the then Maximum Available Commitment thereunder (the
Non-Extension Drawing). The proceeds of the
Non-Extension Drawing under the Liquidity Facility will be
deposited in the Cash Collateral Account for the Class A
Trust to be used for the same purposes and under the same
circumstances, and subject to the same conditions, as cash
payments of Interest Drawings under the Liquidity Facility would
be used. (Liquidity Facility, Section 2.02(b);
Intercreditor Agreement, Section 3.5(d))
Subject to certain limitations, Southwest may, at its option,
arrange for a Replacement Facility at any time to replace the
Liquidity Facility (including without limitation any Replacement
Facility described in the following sentence). In addition, if
the Liquidity Provider shall determine not to extend the
Liquidity Facility, then the Liquidity Provider may, at its
option, arrange for a Replacement Facility to replace the
Liquidity Facility (i) during the period no earlier than
40 days and no later than 25 days prior to the then
scheduled expiration date of the Liquidity Facility and
(ii) at any time after a Non-Extension Drawing has been
made. The Liquidity Provider may also arrange for a Replacement
Facility to replace the Liquidity Facility at any time after a
Downgrade Drawing under the Liquidity Facility. (Intercreditor
Agreement, Section 3.5(c)(iii)) If any Replacement Facility
is provided at any time after a Downgrade Drawing, a Special
Termination Drawing or a Non-Extension Drawing under the
Liquidity Facility, the funds with respect to the Liquidity
Facility on deposit in the Cash Collateral Account will be
returned to the Liquidity Provider being replaced.
(Intercreditor Agreement, Section 3.5(e))
Upon receipt by the Subordination Agent of a Termination Notice
with respect to the Liquidity Facility from the Liquidity
Provider, the Subordination Agent shall request a final drawing
(a Final Drawing) or a special termination drawing
(the Special Termination Drawing), as applicable,
under the Liquidity Facility, in an amount equal to the then
Maximum Available Commitment thereunder. The Subordination Agent
will hold the proceeds thereof in the Cash Collateral Account
for the Class A Trust as cash collateral to be used for the
same purposes and under the same circumstances, and subject to
the same conditions, as cash payments of Interest Drawings under
the Liquidity Facility would be used. (Liquidity Facility,
Section 2.02(d) and (g); Intercreditor Agreement,
Section 3.5(i) and (k))
Drawings under the Liquidity Facility will be made by delivery
by the Subordination Agent of a certificate in the form required
by the Liquidity Facility. Upon receipt of such a certificate,
the Liquidity Provider is obligated to make payment of the
drawing requested thereby in immediately available funds. Upon
payment by the Liquidity Provider of the amount specified in any
drawing under the Liquidity Facility, the Liquidity Provider
will be fully discharged of its obligations under the Liquidity
Facility with respect to such drawing and will not thereafter be
obligated to make any further payments under the Liquidity
Facility in respect of such drawing to the Subordination Agent
or any other person. (Liquidity Facility, Section 2.02(e) and
(f))
Reimbursement of Drawings
The Subordination Agent must reimburse amounts drawn under the
Liquidity Facility by reason of an Interest Drawing, Final
Drawing, Downgrade Drawing, Special Termination Drawing or
Non-Extension Drawing and interest thereon, but only to the
extent that the Subordination Agent has funds available therefor.
S-34
Interest
Drawings, Special Termination Drawings and Final
Drawings
Amounts drawn by reason of an Interest Drawing, Special
Termination Drawing or Final Drawing will be immediately due and
payable, together with interest on the amount of such drawing.
From the date of the drawing to (but excluding) the third
business day following the Liquidity Providers receipt of
the notice of such drawing, interest will accrue (x) with
respect to any Interest Drawing or Final Drawing, at the Base
Rate plus 1.20% per annum, and thereafter, at LIBOR for the
applicable interest period plus 1.20% per annum and
(y) with respect to any Special Termination Drawing (other
than any portion thereof applied to the payment of interest on
the Certificates, which shall accrue interest at the same rate
as an Interest Drawing), in an amount equal to the investment
earnings on the amounts deposited in the Cash Collateral Account
plus a specified margin per annum, provided that the
Subordination Agent will be obligated to reimburse such amounts
only to the extent that the Subordination Agent has funds
available therefor. (Liquidity Facility, Section 3.07)
Base Rate means, on any day, a fluctuating interest
rate per annum in effect from time to time, which rate per annum
shall at all times be equal to (a) the weighted average of
the rates on overnight Federal funds transactions with members
of the Federal Reserve System arranged by Federal funds brokers,
as published for such day (or, if such day is not a business
day, for the next preceding business day) by the Federal Reserve
Bank of New York, or if such rate is not so published for any
day that is a business day, the average of the quotations for
such day for such transactions received by the Liquidity
Provider from three Federal funds brokers of recognized standing
selected by it, plus (b) one-quarter of one percent (1/4 of
1%).
LIBOR means, with respect to any interest period,
(i) the rate per annum appearing on Bloomberg L. P. Page
BBAM (or any successor or substitute therefor) at
approximately 11:00 a.m. (London time) two business days
before the first day of such interest period, as the rate for
dollar deposits with a maturity comparable to such interest
period, or (ii) if the rate calculated pursuant to
clause (i) above is not available, the average (rounded
upwards, if necessary, to the next 1/16 of 1%) of the rates per
annum at which deposits in dollars are offered for the relevant
interest period by three banks of recognized standing selected
by the Liquidity Provider in the London interbank market at
approximately 11:00 a.m. (London time) two business days
before the first day of such interest period in an amount
approximately equal to the principal amount of the drawing to
which such interest period is to apply and for a period
comparable to such interest period.
The amount drawn under the Liquidity Facility by reason of a
Downgrade Drawing, a Non-Extension Drawing or a Special
Termination Drawing will be treated as follows:
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Such amount will be released on any Distribution Date to the
Liquidity Provider to the extent that such amount exceeds the
Required Amount.
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Any portion of such amount withdrawn from the Cash Collateral
Account to pay interest on the Class A Certificates will be
treated in the same way as Interest Drawings.
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The balance of such amount will be invested in certain specified
eligible investments.
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Any Downgrade Drawing under the Liquidity Facility, other than
any portion thereof applied to the payment of interest on the
Class A Certificates, will bear interest (x) subject
to clause (y) below, at a rate equal to the investment
earnings on amounts deposited in the Cash Collateral Account
plus a specified margin on the outstanding amount from time to
time of such Downgrade Drawing and (y) from and after the
date, if any, on which it is converted into a Final Drawing as
described below under Liquidity Events of
Default, at a rate equal to LIBOR for the applicable
interest period (or, as described in the second paragraph of
this Reimbursement of Drawings, the Base Rate) plus
1.20% per annum.
Any Non-Extension Drawing or Special Termination Drawing under
the Liquidity Facility, other than any portion thereof applied
to the payment of interest on the Class A Certificates,
will bear interest (x) subject to clause (y) below, in
an amount equal to the investment earnings on amounts deposited
in the Cash Collateral Account plus a specified margin on the
outstanding amount from time to time of such Non-Extension
Drawing or Special Termination Drawing and (y) from and
after the date, if any, on which it is converted into a Final
Drawing as described below under Liquidity Events of
Default, at a rate equal to LIBOR for the applicable
interest period (or, as described in the second paragraph of
this Reimbursement of Drawings, the Base Rate) plus
1.20% per annum.
S-35
Liquidity Events of Default
Events of default under the Liquidity Facility (each, a
Liquidity Event of Default) will consist of:
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The acceleration of all of the Equipment Notes.
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The occurrence of a Southwest Bankruptcy Event. (Liquidity
Facility, Section 1.01)
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If (i) any Liquidity Event of Default under the Liquidity
Facility has occurred and is continuing and (ii) less than
65% of the aggregate outstanding principal amount of all
Equipment Notes are Performing Equipment Notes, the Liquidity
Provider may, in its discretion, give a notice of termination of
the Liquidity Facility (a Final Termination Notice).
If the Pool Balance of the Class A Certificates is greater
than the aggregate outstanding principal amount of the
Series A Equipment Notes (other than any such Equipment
Notes previously sold or with respect to which the collateral
securing such Equipment Notes has been disposed of) at any time
during the
18-month
period prior to the Final Payment Date, the Liquidity Provider
may, in its discretion, give a notice of special termination of
the Liquidity Facility (a Special Termination Notice
and, together with the Final Termination Notice, a
Termination Notice). The effect of the delivery of a
Termination Notice will be to cause (i) the Liquidity
Facility to expire on the fifth Business Day after the date on
which such Termination Notice is received by the Subordination
Agent, (ii) the Subordination Agent to request promptly,
and the Liquidity Provider under the Liquidity Facility to make,
a Final Drawing or Special Termination Drawing, as applicable,
thereunder in an amount equal to the then Maximum Available
Commitment thereunder, (iii) in the case of a Final
Drawing, any Drawing remaining unreimbursed as of the date of
termination to be automatically converted into a Final Drawing
under the Liquidity Facility, and (iv) all amounts owing to
the Liquidity Provider automatically to become accelerated.
Notwithstanding the foregoing, the Subordination Agent will be
obligated to pay amounts owing to the Liquidity Provider only to
the extent of funds available therefor after giving effect to
the payments in accordance with the provisions set forth under
Description of the Intercreditor AgreementPriority
of Distributions. (Liquidity Facility, Sections 2.09
and 6.01) Upon the circumstances described below under
Description of the Intercreditor
AgreementIntercreditor Rights, the Liquidity
Provider may become the Controlling Party with respect to the
exercise of remedies under the Indentures. (Intercreditor
Agreement, Section 2.6(c))
The initial Liquidity Provider will be BNP Paribas, a
société anonyme under French law, acting
through its New York branch. The Liquidity Provider has a
short-term rating of
P-1 from
Moodys and a short-term issuer credit rating of
A-1+ from
Standard & Poors.
S-36
DESCRIPTION OF THE INTERCREDITOR AGREEMENT
The following summary describes the material provisions of the
Intercreditor Agreement (the Intercreditor
Agreement) among the Trustees, the Liquidity Provider and
Wilmington Trust Company, as subordination agent (the
Subordination Agent). The summary does not purport
to be complete and is qualified in its entirety by reference to
all of the provisions of the Intercreditor Agreement, which will
be filed as an exhibit to a Current Report on
Form 8-K
to be filed by Southwest with the Commission.
Controlling
Party
Each Loan Trustee will be directed in taking, or refraining from
taking, any action under an Indenture or with respect to the
Equipment Notes issued under such Indenture, by the holders of
at least a majority of the outstanding principal amount of the
Equipment Notes issued under such Indenture, so long as no
Indenture Default shall have occurred and be continuing
thereunder. For so long as the Subordination Agent is the
registered holder of the Equipment Notes, the Subordination
Agent will act with respect to the preceding sentence in
accordance with the directions of the Trustees for whom the
Equipment Notes issued under such Indenture are held as
Trust Property, to the extent constituting, in the
aggregate, directions with respect to the required principal
amount of Equipment Notes.
After the occurrence and during the continuance of an Indenture
Default under an Indenture, each Loan Trustee will be directed
in taking, or refraining from taking, any action thereunder or
with respect to the Equipment Notes issued under such Indenture,
including acceleration of such Equipment Notes or foreclosing
the lien on the related Aircraft, by the Controlling Party,
subject to the limitations described below. See
Description of the CertificatesIndenture Defaults
and Certain Rights Upon an Indenture Default for a
description of the rights of the Certificateholders of each
Trust to direct the respective Trustees.
The Controlling Party will be:
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The Class A Trustee.
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Upon payment of Final Distributions to the holders of
Class A Certificates, the Class B Trustee.
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Under certain circumstances, and notwithstanding the foregoing,
the Liquidity Provider, as discussed in the next paragraph.
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At any time after 18 months from the earliest to occur of
(x) the date on which the entire available amount under the
Liquidity Facility shall have been drawn (excluding a Downgrade
Drawing, Non-Extension Drawing or Special Termination Drawing
but including a Final Drawing or a Downgrade Drawing, a
Non-Extension Drawing or Special Termination Drawing that has
been converted into a Final Drawing) and remains unreimbursed,
(y) the date on which the entire amount of any Downgrade
Drawing, Non-Extension Drawing or Special Termination Drawing on
deposit in the Cash Collateral Account up to the Required Amount
as of such date shall have been withdrawn from the Cash
Collateral Account to pay interest on the Class A
Certificates and remains unreimbursed and (z) the date on
which all Equipment Notes shall have been accelerated, the
Liquidity Provider (so long as the Liquidity Provider has not
defaulted in its obligation to make any Drawing under the
Liquidity Facility) shall have the right to become the
Controlling Party with respect to any Indenture.
Subject to certain conditions, notwithstanding the foregoing,
(a) if one or more holders of the Class B Certificates
have purchased the Series A Equipment Notes or (b) one
or more holders of Additional Certificates have purchased the
Series A Equipment Notes and Series B Equipment Notes,
in each case issued under an Indenture, the holders of the
majority in aggregate unpaid principal amount of Equipment Notes
issued under such Indenture, rather than the Controlling Party,
shall be entitled to direct the Loan Trustee in exercising
remedies under such Indenture. Any Equipment Notes issued under
such Indenture that have not been purchased by a
Certificateholder shall, during the continuance of an Indenture
Default under such Indenture, be subject to direction by the
Controlling Party.
S-37
For purposes of giving effect to the rights of the Controlling
Party, the Trustees (other than the Controlling Party) shall
irrevocably agree, and the Certificateholders (other than the
Certificateholders represented by the Controlling Party) will be
deemed to agree by virtue of their purchase of Certificates,
that the Subordination Agent, as record holder of the Equipment
Notes, shall exercise its voting rights in respect of the
Equipment Notes as directed by the Controlling Party.
(Intercreditor Agreement, Section 2.6) For a description of
certain limitations on the Controlling Partys rights to
exercise remedies, see Description of the Equipment
NotesRemedies.
Final Distributions means, with respect to the
Certificates of any Trust on any Distribution Date, the sum of
(x) the aggregate amount of all accrued and unpaid interest
on such Certificates and (y) the Pool Balance of such
Certificates as of the immediately preceding Distribution Date.
For purposes of calculating Final Distributions with respect to
the Certificates of any Trust, any premium paid on the Equipment
Notes held in such Trust which has not been distributed to the
Certificateholders of such Trust (other than such premium or a
portion thereof applied to the payment of interest on the
Certificates of such Trust or the reduction of the Pool Balance
of such Trust) shall be added to the amount of such Final
Distributions.
Equipment
Note Buyout Right of Subordinated
Certificateholders
Upon the occurrence and during the continuation of an Equipment
Note Buyout Event, so long as no holder of Additional
Certificates has elected to exercise its buyout right as
described below, any Class B Certificateholders may, upon
15 days written notice to the Subordination Agent,
each Trustee (and each such Trustee shall promptly provide such
notice to all Certificateholders of its Trust) and each
applicable Loan Trustee given on or before the date which is six
months after the occurrence of the applicable Equipment Note
Buyout Event, purchase on the third Business Day next following
the expiry of such
15-day
notice period all, but not less than all, of the Series A
Equipment Notes issued under any one or more of the Indentures
for a purchase price equal to the aggregate Note Target Price
for such Series A Equipment Notes plus an amount equal to
the Excess Liquidity Obligations in respect of such Indentures.
If prior to the end of such
15-day
period, any other holder of the Class B Certificates
notifies the Subordination Agent, each Trustee (and each such
Trustee shall promptly notify all Certificateholders of its
Trust, including the purchasing Class B Certificateholder)
and each applicable Loan Trustee that it wishes to participate
in such purchase, then such other Certificateholder may join
with the purchasing Certificateholder to purchase such
Series A Equipment Notes pro rata based on the interest in
the Class B Trust held by each such Certificateholder
compared to such interests held by all such participating
Certificateholders. (Intercreditor Agreement, Section 2.7)
If any Additional Certificates are issued and an Equipment Note
Buyout Event has occurred and is continuing, regardless of
whether any Class B Certificateholder has elected to
exercise its right to purchase Series A Equipment Notes,
any holder of such Additional Certificates will have the right
to purchase all, but not less than all, of the Series A
Equipment Notes and Series B Equipment Notes issued under
any one or more Indentures for a purchase price equal to the
aggregate Note Target Price for such Series A Equipment
Notes and the Series B Equipment Notes plus an amount equal
to the Excess Liquidity Obligations in respect of such
Indentures. If any Refinancing Certificates are issued, the
holders of such Refinancing Certificates will have the same
right to purchase Equipment Notes as the Class they refinanced.
See Possible Issuance of Additional Certificates and
Refinancing of Certificates.
The right of any holder of Class B Certificates or
Additional Certificates to purchase Equipment Notes as described
above will be subject to such purchase being exempt from, or not
subject to, the registration requirements of the Securities Act
of 1933, as amended, and in compliance with other applicable
securities laws. Each purchaser will be required to provide to
the Subordination Agent reasonably satisfactory evidence of
compliance with such laws.
Equipment Note Buyout Event means the occurrence and
continuation of (i) a Certificate Buyout Event or
(ii) an Indenture Default under any Indenture that has
continued for a period of five years without an Actual
Disposition Event occurring with respect to the Equipment Notes
issued under such Indenture.
Excess Liquidity Obligations means, with respect to
an Indenture, an amount equal to the sum of (i) the amount
of fees payable to the Liquidity Provider under the Liquidity
Facility, multiplied by a fraction, the numerator of which is
the then outstanding aggregate principal amount of the
Series A Equipment Notes issued under such Indenture and
the denominator of which is the then outstanding aggregate
principal amount of all
S-38
Series A Equipment Notes, (ii) interest on any
Non-Extension Drawing, Downgrade Drawing or Special Termination
Drawing payable under the Liquidity Facility in excess of
investment earnings on such drawings, multiplied by the fraction
specified in clause (i) above, (iii) if any payment
default exists with respect to interest on any Series A
Equipment Notes, interest on any Interest Drawing (or portion of
any Downgrade Drawing, Non-Extension Drawing or Special
Termination Drawing that is used to pay interest on the
Class A Certificates) or Final Drawing payable under the
Liquidity Facility in excess of the sum of (a) investment
earnings from any Final Drawing plus (b) any interest at
the past due rate actually payable (whether or not in fact paid)
by Southwest on the overdue scheduled interest on the Equipment
Notes in respect of which such Interest Drawing (or portion of
any Downgrade Drawing, Non-Extension Drawing or Special
Termination Drawing that is used to pay interest on the
Class A Certificates) or Final Drawing was made by the
Liquidity Provider, multiplied by a fraction the numerator of
which is the aggregate overdue amounts of interest on the
Series A Equipment Notes issued under such Indenture (other
than interest becoming due and payable solely as a result of
acceleration of any such Equipment Notes) and the denominator of
which is the then aggregate overdue amounts of interest on all
Series A Equipment Notes (other than interest becoming due
and payable solely as a result of acceleration of any such
Equipment Notes), and (iv) any other amounts owed to the
Liquidity Provider by the Subordination Agent as borrower under
the Liquidity Facility other than amounts due as repayment of
advances thereunder or as interest on such advances, except to
the extent payable pursuant to clauses (ii) and
(iii) above, multiplied by the fraction specified in
clause (i) above. The fractions specified in this
definition will be revised if Additional Certificates with
credit support similar to the Liquidity Facility are issued. See
Possible Issuance of Additional Certificates and
Refinancing of Certificates.
Note Target Price means, for any Equipment Note
issued under any Indenture: (i) the aggregate outstanding
principal amount of such Equipment Note, plus (ii) the
accrued and unpaid interest thereon, together with all other
sums owing on or in respect of such Equipment Note (including,
without limitation, enforcement costs incurred by the
Subordination Agent in respect of such Equipment Note).
The purchase price payable in connection with an exercise of the
Equipment Note buyout right shall be paid to the Subordination
Agent. The Subordination Agent shall distribute any such payment
in the order of priority described in Priority of
Distributions.
After one or more Class B Certificateholders, or one or
more holders of Additional Certificates, as the case may be,
have exercised their Equipment Note buyout right and purchased
any Series A Equipment Notes (and, if applicable,
Series B Equipment Notes), (i) any proceeds or
payments made with respect to such Equipment Notes will be paid
directly to the holders of such Equipment Notes pro rata and
will not be subject to the subordination provisions of the
Intercreditor Agreement (but the holders of such Equipment Notes
shall remain bound by the provisions in the Intercreditor
Agreement relating to limitations on the exercise of remedies
(see Limitation on Exercise of Remedies)) and
(ii) if and to the extent the Loan Trustee under the
related Indenture receives any amounts with respect to Excess
Liquidity Obligations under such Indenture or reimbursement of
enforcement costs incurred by the Subordination Agent in respect
of such Equipment Notes that, in each case, represent amounts
previously paid by such Certificateholders in connection with
the purchase of such Equipment Notes, such Loan Trustee shall
pay such amounts to the holders of such Equipment Notes pro
rata. Any proceeds or payments made with respect to any Series
of Equipment Notes issued under the related Indenture that has
not been purchased pursuant to the buyout rights described above
will continue to be paid to the Subordination Agent and be
subject to the subordination provisions of the Intercreditor
Agreement.
Each purchasing Certificateholder will have to acknowledge,
consent and agree that, notwithstanding the purchase of any
Equipment Notes under any Indenture pursuant to the buyout
rights described above, the cross-collateralization provisions
of such Indenture will remain unchanged and in full force and
effect and cannot be amended, modified or otherwise waived in
any manner without the prior written consent of the
Subordination Agent acting on the instructions of each Trustee.
Any taxes incurred by the relevant Loan Trustee, the
Subordination Agent or the relevant Trustee in connection with
the sale of any Equipment Note pursuant to the exercise by one
or more Certificateholders of the buyout right described above
shall be paid by such purchasing Certificateholders.
If Southwest or any of its affiliates is a Certificateholder, it
will not be entitled to purchase Equipment Notes upon the
occurrence of an Equipment Note Buyout Event.
S-39
Limitation
on Exercise of Remedies
So long as any Certificates are outstanding, during nine months
after the earlier of (x) the acceleration of the Equipment
Notes under any Indenture and (y) the occurrence of a
Southwest Bankruptcy Event, without the consent of each Trustee,
no Aircraft subject to the lien of such Indenture or such
Equipment Notes may be sold in the exercise of remedies under
such Indenture, if the net proceeds from such sale would be less
than the Minimum Sale Price for such Aircraft or such Equipment
Notes.
Minimum Sale Price means, with respect to any
Aircraft or the Equipment Notes issued in respect of such
Aircraft, at any time, the lesser of (1) in the case of the
sale of an Aircraft, 75%, or in the case of the sale of related
Equipment Notes, 85%, of the Appraised Current Market Value of
such Aircraft and (2) the sum of the aggregate Note Target
Price of such Equipment Notes and an amount equal to the Excess
Liquidity Obligations in respect of the Indenture under which
such Equipment Notes were issued.
Following the occurrence and during the continuation of an
Indenture Default under any Indenture, in the exercise of
remedies pursuant to such Indenture, the Loan Trustee under such
Indenture may be directed to lease the Aircraft to any person
(including Southwest) so long as the Loan Trustee in doing so
acts in a commercially reasonable manner within the
meaning of Article 9 of the Uniform Commercial Code as in
effect in any applicable jurisdiction (including
Sections 9-610
and 9-627 thereof).
The foregoing provisions apply whether the exercise of remedies
under an Indenture is being directed by the Controlling Party or
by the holders of a majority of the outstanding principal amount
of Equipment Notes issued under such Indenture.
Following the occurrence of a Southwest Bankruptcy Event and
during the pendency thereof, the Controlling Party receives a
proposal from or on behalf of Southwest to restructure the
financing of any one or more of the Aircraft, the Controlling
Party will promptly thereafter give the Subordination Agent and
each Trustee notice of the material economic terms and
conditions of such restructuring proposal whereupon the
Subordination Agent acting on behalf of each Trustee will
endeavor using reasonable commercial efforts to make such terms
and conditions of such restructuring proposal available to all
Certificateholders (whether by posting on DTCs Internet
board or otherwise). Thereafter, neither the Subordination Agent
nor any Trustee, whether acting on instructions of the
Controlling Party or otherwise, may, without the consent of each
Trustee, enter into any term sheet, stipulation or other
agreement (whether in the form of an adequate protection
stipulation, an extension under Section 1110(b) of the
U.S. Bankruptcy Code or otherwise) to effect any such
restructuring proposal with or on behalf of Southwest unless and
until the material economic terms and conditions of such
restructuring proposal shall have been made available to all
Certificateholders for a period of not less than 15 calendar
days (except that such requirement shall not apply to any such
term sheet, stipulation or other agreement that is entered into
on or prior to the expiry of the
60-Day
Period and that is effective for a period not longer than three
months from the expiry of the
60-Day
Period).
In the event that any Certificateholder gives irrevocable notice
of the exercise of (i) its right to buy out any Equipment
Notes (as described in Equipment Note Buyout Right
of Subordinated Certificateholders) or (ii) its right
to purchase all (but not less than all) of the Class of
Certificates represented by the then Controlling Party (as
described in Description of the CertificatesPurchase
Rights of Certificateholders), in either case, prior to
the expiry of the
15-day
notice period specified above, such Controlling Party may not
direct the Subordination Agent or any Trustee to enter into
(i) in the case of such Equipment Note buyout, any such
restructuring proposal with respect to the Aircraft related to
such Equipment Notes, or (ii) in the case of such purchase
of Certificates, any such restructuring proposal with respect to
any of the Aircraft, in either case, unless and until such
Certificateholder fails to purchase such Equipment Notes or
Class of Certificates, as applicable, on the date that it is
required to make such purchase.
Upon the occurrence and continuation of an Indenture Default
under any Indenture, the Subordination Agent will be required to
obtain three desktop appraisals from the appraisers selected by
the Controlling Party setting forth the current market value,
current lease rate and distressed value (in each case, as
defined by the International Society of Transport Aircraft
Trading) of the Aircraft subject to such Indenture (each such
appraisal, an Appraisal and the
S-40
current market value appraisals being referred to herein as the
Post Default Appraisals). For so long as any
Indenture Default shall be continuing under any Indenture, and
without limiting the right of the Controlling Party to request
more frequent Appraisals, the Subordination Agent will be
required to obtain additional Appraisals on the date that is
364 days from the date of the most recent Appraisal or if a
Southwest Bankruptcy Event shall have occurred and is
continuing, on the date that is 180 days from the date of
the most recent Appraisal. (Intercreditor Agreement,
Section 4.1(a)(iv))
Appraised Current Market Value of any Aircraft means
the lower of the average and the median of the three most recent
Post Default Appraisals of such Aircraft.
Priority of Distributions
All payments in respect of the Equipment Notes and certain other
payments received on each Regular Distribution Date or Special
Distribution Date (each, a Distribution Date) will
be promptly distributed by the Subordination Agent on such
Distribution Date in the following order of priority:
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To (i) the Subordination Agent, any Trustee and the
Liquidity Provider to the extent required to pay certain
out-of-pocket costs and expenses actually incurred by them (or
reasonably expected to be incurred by the Subordination Agent
for the period ending on the next succeeding Regular
Distribution Date, which shall not exceed $150,000 unless
approved in writing by the Controlling Party) or (ii) to
reimburse any Certificateholder or the Liquidity Provider in
respect of payments made to the Subordination Agent or any
Trustee in connection with the protection or realization of the
value of the Equipment Notes held by the Subordination Agent or
any Collateral under (and as defined in) any Indenture
(collectively, the Administration Expenses).
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To the Liquidity Provider (a) to the extent required to pay
the Liquidity Expenses or, (b) in the case of a Special
Payment on account of the redemption, purchase or prepayment of
all of the Equipment Notes (an Equipment Note Special
Payment ), so long as no Indenture Default has occurred
and is continuing under any Indenture, the amount of accrued and
unpaid Liquidity Expenses that are not yet due, multiplied by
the Applicable Fraction or, if an Indenture Default has occurred
and is continuing, clause (a) will apply.
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To the Liquidity Provider (i) (a) to the extent required to
pay interest accrued on the Liquidity Obligations or,
(b) in the case of an Equipment Note Special Payment, so
long as no Indenture Default has occurred and is continuing
under any Indenture, to the extent required to pay accrued and
unpaid interest then in arrears on the Liquidity Obligations
plus an amount equal to the amount of accrued and unpaid
interest on the Liquidity Obligations not in arrears, multiplied
by the Applicable Fraction or, if an Indenture Default has
occurred and is continuing, clause (a) will apply and
(ii) if a Special Termination Drawing has been made and has
not been converted into a Final Drawing, the outstanding amount
of such Special Termination Drawing.
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To (i) the Liquidity Provider to the extent required to pay
the outstanding amount of all Liquidity Obligations and
(ii) if applicable, unless (in the case of this
clause (ii) only) (x) less than 65% of the aggregate
outstanding principal amount of all Equipment Notes are
Performing Equipment Notes and a Liquidity Event of Default
shall have occurred and is continuing or (y) a Final
Drawing shall have occurred under the Liquidity Facility, to
replenish the Cash Collateral Account up to the Required Amount.
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To the Subordination Agent, any Trustee or any Certificateholder
to the extent required to pay certain fees, taxes, charges and
other amounts payable.
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To the Class A Trustee (a) to the extent required to
pay accrued and unpaid interest at the Stated Interest Rate on
the Pool Balance of the Class A Certificates or,
(b) in the case of an Equipment Note Special Payment, so
long as no Indenture Default has occurred and is continuing
under any Indenture, to the extent required to pay any such
interest that is then due together with (without duplication)
accrued and unpaid interest at the Stated Interest Rate on the
outstanding principal amount of the Series A Equipment
Notes held in the Class A Trust being redeemed, purchased
or prepaid or, if an Indenture Default has occurred and is
continuing, clause (a) will apply.
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To the Class B Trustee (a) to the extent required to
pay accrued and unpaid Class B Adjusted Interest on the
Class B Certificates or, (b) in the case of an
Equipment Note Special Payment, so long as no Indenture
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S-41
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Default has occurred and is continuing under any Indenture, to
the extent required to pay any such Class B Adjusted
Interest that is then due or, if an Indenture Default has
occurred and is continuing, clause (a) will apply.
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To the Class A Trustee to the extent required to pay
Expected Distributions on the Class A Certificates.
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To the Class B Trustee (a) to the extent required to
pay accrued and unpaid interest at the Stated Interest Rate on
the Pool Balance of the Class B Certificates (other than
Class B Adjusted Interest paid above) or, (b) in the
case of an Equipment Note Special Payment, so long as no
Indenture Default has occurred and is continuing under any
Indenture, to the extent required to pay any such interest that
is then due (other than Class B Adjusted Interest paid
above) together with (without duplication) accrued and unpaid
interest at the Stated Interest Rate on the outstanding
principal amount of the Series B Equipment Notes held in
the Class B Trust and being redeemed, purchased or prepaid
or, if an Indenture Default has occurred and is continuing,
clause (a) will apply.
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To the Class B Trustee to the extent required to pay
Expected Distributions on the Class B Certificates.
(Intercreditor Agreement, Section 3.2)
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If one or more Classes of Additional Certificates are issued,
the priority of distributions in the Intercreditor Agreement may
be revised such that certain obligations relating to the
Additional Certificates may rank ahead of certain obligations
with respect to the Certificates. See Possible Issuance of
Additional Certificates and Refinancing of Certificates.
Applicable Fraction means, with respect to any
Special Distribution Date, a fraction, the numerator of which
shall be the amount of principal of the applicable Series A
Equipment Notes being redeemed, purchased or prepaid on such
Special Distribution Date, and the denominator of which shall be
the aggregate unpaid principal amount of all Series A
Equipment Notes outstanding as of such Special Distribution
Date. The definition of Applicable Fraction will be
revised if Additional Certificates are issued. See
Possible Issuance of Additional Certificates and
Refinancing of Certificates.
Liquidity Obligations means the obligations to
reimburse or to pay the Liquidity Provider all principal,
interest, fees and other amounts owing to it under the Liquidity
Facility or certain other agreements.
Liquidity Expenses means the Liquidity Obligations
other than any interest accrued thereon or the principal amount
of any drawing under the Liquidity Facility.
Expected Distributions means, with respect to the
Certificates of any Trust on any Distribution Date (the
Current Distribution Date), the difference between:
(A) the Pool Balance of such Certificates as of the
immediately preceding Distribution Date (or, if the Current
Distribution Date is the first Distribution Date, the original
aggregate face amount of the Certificates of such
Trust), and
(B) the Pool Balance of such Certificates as of the Current
Distribution Date calculated on the basis that (i) the
principal of the Equipment Notes other than Performing Equipment
Notes (the Non-Performing Equipment Notes) held in
such Trust has been paid in full and such payments have been
distributed to the holders of such Certificates, (ii) the
principal of the Performing Equipment Notes held in such Trust
has been paid when due (but without giving effect to any
acceleration of Performing Equipment Notes) and such payments
have been distributed to the holders of such Certificates and
(iii) the principal of any Equipment Notes formerly held in
such Trust that have been sold pursuant to the Intercreditor
Agreement has been paid in full and such payments have been
distributed to the holders of such Certificates.
For purposes of calculating Expected Distributions with respect
to the Certificates of any Trust, any premium paid on the
Equipment Notes held in such Trust that has not been distributed
to the Certificateholders of such Trust (other than such premium
or a portion thereof applied to the payment of interest on the
Certificates of such Trust or the reduction of the Pool Balance
of such Trust) shall be added to the amount of Expected
Distributions.
Class B Adjusted Interest means, as of any
Current Distribution Date, (I) any interest of the type
described in clause (II) of this definition accruing prior
to the immediately preceding Distribution Date which remains
unpaid and (II) interest at the Stated Interest Rate for
the Class B Certificates (x) for the number of days
during the period commencing on, and including, the immediately
preceding Distribution Date (or, if the Current Distribution
Date is the first Distribution Date, the Issuance Date) and
ending on, but excluding, the Current Distribution Date, on the
S-42
Preferred B Pool Balance on such Current Distribution Date and
(y) on the principal amount calculated pursuant to clauses
(B)(i), (ii), (iii) and (iv) of the definition of
Preferred B Pool Balance for each Series B Equipment Note
with respect to which a disposition, distribution, sale or
Deemed Disposition Event has occurred since the immediately
preceding Distribution Date (but only if no such event has
previously occurred with respect to such Series B Equipment
Note), for each day during the period, for each such
Series B Equipment Note, commencing on, and including, the
immediately preceding Distribution Date (or, if the Current
Distribution Date is the first Distribution Date, the Issuance
Date) and ending on, but excluding the date of disposition,
distribution, sale or Deemed Disposition Event with respect to
such Series B Equipment Note, Aircraft or Collateral under
(and as defined in) the related Indenture, as the case may be.
Preferred B Pool Balance means, as of any date, the
excess of (A) the Pool Balance of the Class B
Certificates as of the immediately preceding Distribution Date
(or, if such date is on or before the first Distribution Date,
the original aggregate face amount of the Class B
Certificates) (after giving effect to payments made on such
date) over (B) the sum of (i) the outstanding
principal amount of each Series B Equipment Note that
remains unpaid as of such date subsequent to the disposition of
the Collateral under (and as defined in) the related Indenture
and after giving effect to any distributions of the proceeds of
such disposition applied under such Indenture to the payment of
each such Series B Equipment Note, (ii) the
outstanding principal amount of each Series B Equipment
Note that remains unpaid as of such date subsequent to the
scheduled date of mandatory redemption of such Series B
Equipment Note following an Event of Loss with respect to the
Aircraft which secured such Series B Equipment Note and
after giving effect to the distributions of any proceeds in
respect of such Event of Loss applied under such Indenture to
the payment of each such Series B Equipment Note,
(iii) the excess, if any, of (x) the outstanding
amount of principal and interest as of the date of sale of each
Series B Equipment Note previously sold over (y) the
purchase price received with respect to the sale of such
Series B Equipment Note (net of any applicable costs and
expenses of sale) and (iv) the outstanding principal amount
of any Series B Equipment Note with respect to which a
Deemed Disposition Event has occurred; provided, however,
that if more than one of the clauses (i), (ii), (iii) and
(iv) is applicable to any one Series B Equipment Note,
only the amount determined pursuant to the clause that first
became applicable shall be counted with respect to such
Series B Equipment Note.
Deemed Disposition Event means, in respect of any
Equipment Note, the continuation of an Indenture Default in
respect of such Equipment Note without an Actual Disposition
Event occurring in respect of such Equipment Note for a period
of five years from the date of the occurrence of such Indenture
Default.
Actual Disposition Event means, in respect of any
Equipment Note, (i) the disposition of the Collateral (as
defined in the Indenture pursuant to which such Equipment Note
was issued) securing such Equipment Note, (ii) the
occurrence of the mandatory redemption date for such Equipment
Note following an Event of Loss with respect to the Aircraft
which secured such Equipment Note or (iii) the sale of such
Equipment Note.
Interest Drawings under the Liquidity Facility and withdrawals
from the Cash Collateral Account, in respect of interest on the
Class A Certificates will be distributed to the Trustee for
the Class A Trust, notwithstanding the priority of
distributions set forth in the Intercreditor Agreement and
otherwise described herein. All amounts on deposit in the Cash
Collateral Account that are in excess of the Required Amount
will be paid to the Liquidity Provider.
Voting of Equipment Notes
In the event that the Subordination Agent, as the registered
holder of any Equipment Note, receives a request for its consent
to any amendment, supplement, modification, consent or waiver
under such Equipment Note or the related Indenture (or, if
applicable, the related Participation Agreement or other related
document), (i) if no Indenture Default shall have occurred
and be continuing with respect to such Indenture, the
Subordination Agent shall request directions from the Trustee of
the Trust that holds such Equipment Note and shall vote or
consent in accordance with such directions and (ii) if any
Indenture Default shall have occurred and be continuing with
respect to such Indenture, the Subordination Agent will exercise
its voting rights as directed by the Controlling Party, subject
to certain limitations; provided that no such amendment,
modification, consent or waiver shall, without the consent of
the Liquidity Provider and each affected Certificateholder,
reduce the amount of principal or interest payable by Southwest
under any Equipment Note or change the time of payments or
method of calculation of any amount under any Equipment Note.
(Intercreditor Agreement, Section 9.1(b))
S-43
List of Certificateholders
Upon the occurrence of an Indenture Default, the Subordination
Agent shall instruct the Trustees to, and the Trustees shall,
request that DTC post on its Internet bulletin board a
securities position listing setting forth the names of all the
parties reflected on DTCs books as holding interests in
the Certificates. (Intercreditor Agreement, Section 5.1(c)).
Promptly after the occurrence of a Triggering Event or an
Indenture Default resulting from the failure of Southwest to
make payments on any Equipment Note and on every Regular
Distribution Date while the Triggering Event or such Indenture
Default shall be continuing, the Subordination Agent will
provide to the Trustee, the Liquidity Provider, the Rating
Agencies and Southwest a statement setting forth the following
information:
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After a Southwest Bankruptcy Event, with respect to each
Aircraft, whether such Aircraft is (i) subject to the
60-Day
Period, (ii) subject to an election by Southwest under
Section 1110(a) of the U.S. Bankruptcy Code,
(iii) covered by an agreement contemplated by
Section 1110(b) of the U.S. Bankruptcy Code or
(iv) not subject to any of (i), (ii) or (iii).
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To the best of the Subordination Agents knowledge, after
requesting such information from Southwest, (i) whether the
Aircraft are currently in service or parked in storage,
(ii) the maintenance status of the Aircraft and
(iii) location of the Engines (as defined in the
Indentures). Southwest has agreed to provide such information
upon request of the Subordination Agent, but no more frequently
than every three months with respect to each Aircraft so long as
it is subject to the lien of an Indenture.
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The current Pool Balances of the Certificates, the Preferred B
Pool Balance and outstanding principal amount of all Equipment
Notes for all Aircraft.
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The expected amount of interest which will have accrued on the
Equipment Notes and on the Certificates as of the next Regular
Distribution Date.
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The amounts paid to each person on such Distribution Date
pursuant to the Intercreditor Agreement.
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Details of the amounts paid on such Distribution Date identified
by reference to the relevant provision of the Intercreditor
Agreement and the source of payment (by Aircraft and party).
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If the Subordination Agent has made a Final Drawing under the
Liquidity Facility.
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The amounts currently owed to the Liquidity Provider.
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The amounts drawn under the Liquidity Facility.
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After a Southwest Bankruptcy Event, any operational reports
filed by Southwest with the bankruptcy court which are available
to the Subordination Agent on a non-confidential basis.
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(Intercreditor Agreement, Section 5.1(d))
Wilmington Trust Company will be the Subordination Agent
under the Intercreditor Agreement. Southwest and its affiliates
may from time to time enter into banking and trustee
relationships with the Subordination Agent and its affiliates.
The Subordination Agents address is Wilmington
Trust Company, Rodney Square North, 1100 North Market
Street, Wilmington, Delaware
19890-0001,
Attention: Corporate Trust Administration.
The Subordination Agent may resign at any time, in which event a
successor Subordination Agent will be appointed as provided in
the Intercreditor Agreement. The Controlling Party may remove
the Subordination Agent for cause as provided in the
Intercreditor Agreement. In such circumstances, a successor
Subordination Agent will be appointed as provided in the
Intercreditor Agreement. Any resignation or removal of the
Subordination Agent and appointment of a successor Subordination
Agent does not become effective until acceptance of the
appointment by the successor Subordination Agent. (Intercreditor
Agreement, Section 8.1)
S-44
DESCRIPTION OF THE AIRCRAFT AND THE APPRAISALS
The aircraft to be mortgaged as security for the Equipment Notes
consist of 16 Boeing
737-700
aircraft (collectively, the Aircraft). Southwest has
taken delivery of, owns and currently operates, each of the
Aircraft. The Aircraft have been designed to be in compliance
with Stage 3 noise level standards, which are the most
restrictive regulatory standards currently in effect in the
United States for aircraft noise abatement.
Boeing
737-700
Aircraft
The Boeing
737-700 is a
single-aisle commercial jet aircraft with a seating capacity, in
Southwests single-class configuration, of 137 passengers.
The engine type utilized on Southwests
737-700
aircraft is the CFM International, Inc. CFM56-7B. All of
the Aircraft are equipped with winglets.
Age of
Aircraft
The Aircraft were new when delivered to Southwest from The
Boeing Company (Boeing) and consist of four aircraft
delivered in 2006 and 12 aircraft delivered in 2007.
The table below sets forth the appraised values of the Aircraft,
as determined by Aircraft Information Services, Inc.
(AISI), BACK Aviation Solutions (BACK)
and BK Associates, Inc. (BK) (collectively the
Appraisers).
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Registration
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Manufacturers
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Delivery
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Appraisers Valuations
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Appraised
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Aircraft Type
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Number
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Serial Number
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Date
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AISI
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BACK
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BK
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Base Value(1)
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Boeing
737-700
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N259WN
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35554
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11/1/2006
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$
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40,800,000
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$
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38,580,000
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$
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37,550,000
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$
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38,580,000
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Boeing
737-700
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N260WN
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32518
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11/22/2006
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40,890,000
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38,610,000
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37,550,000
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38,610,000
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Boeing
737-700
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N261WN
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32517
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12/14/2006
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40,960,000
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38,900,000
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37,550,000
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38,900,000
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Boeing
737-700
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N262WN
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32519
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12/21/2006
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41,010,000
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38,920,000
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37,550,000
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38,920,000
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Boeing
737-700
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N263WN
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32520
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1/17/2007
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43,750,000
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39,220,000
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37,900,000
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39,220,000
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Boeing
737-700
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N264LV
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32521
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1/24/2007
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43,770,000
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39,230,000
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37,900,000
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39,230,000
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Boeing
737-700
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N265WN
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32522
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2/6/2007
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43,810,000
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39,510,000
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37,900,000
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39,510,000
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Boeing
737-700
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N267WN
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32525
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2/26/2007
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43,910,000
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39,600,000
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37,900,000
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39,600,000
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Boeing
737-700
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N268WN
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32524
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3/5/2007
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43,930,000
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39,810,000
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38,200,000
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39,810,000
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Boeing
737-700
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N269WN
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32526
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3/13/2007
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43,950,000
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39,820,000
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38,200,000
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39,820,000
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Boeing
737-700
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N272WN
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32527
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3/29/2007
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44,050,000
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39,850,000
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38,200,000
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39,850,000
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Boeing
737-700
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N274WN
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32529
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4/23/2007
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44,170,000
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40,150,000
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38,200,000
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40,150,000
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Boeing
737-700
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N275WN
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36153
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5/3/2007
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44,190,000
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40,420,000
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38,200,000
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40,420,000
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Boeing
737-700
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N276WN
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32530
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5/14/2007
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44,240,000
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40,450,000
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38,200,000
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40,450,000
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Boeing
737-700
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N277WN
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32531
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5/24/2007
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44,310,000
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40,460,000
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38,200,000
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40,460,000
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Boeing
737-700
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N278WN
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36441
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5/31/2007
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44,320,000
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40,470,000
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38,200,000
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40,470,000
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$
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692,060,000
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$
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634,000,000
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$
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607,400,000
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$
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634,000,000
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(1)
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The appraised value of each
Aircraft for purposes of this Offering is the lesser of the
average and median values of such Aircraft as appraised by the
Appraisers.
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S-45
For purposes of the foregoing chart, AISI, BACK and BK each was
asked to provide its opinion as to the appraised value of each
Aircraft and such opinions were furnished setting forth the
value of each Aircraft as of June 25, 2007, July 16, 2007
and July 16, 2007, respectively. As part of this process,
all three Appraisers performed desk top appraisals
without any physical inspection of the Aircraft. The appraisals
are based on various assumptions and methodologies, which vary
among the appraisals. The Appraisers have delivered letters
summarizing their respective appraisals, copies of which are
annexed to this Prospectus Supplement as Appendix II. For a
discussion of the assumptions and methodologies used in each of
the appraisals, reference is hereby made to such summaries.
An appraisal is only an estimate of value. It is not indicative
of the price at which an Aircraft may be purchased from the
manufacturer. Nor should it be relied upon as a measure of
realizable value. The proceeds realized upon a sale of any
Aircraft may be less than its appraised value. The value of the
Aircraft in the event of the exercise of remedies under the
applicable Indenture will depend on market and economic
conditions, the availability of buyers, the condition of the
Aircraft and other similar factors. Accordingly, there can be no
assurance that the proceeds realized upon any such exercise with
respect to the Equipment Notes and the Aircraft pursuant to the
applicable Indenture would equal the appraised value of such
Aircraft or be sufficient to satisfy in full payments due on
such Equipment Notes or the Certificates.
S-46
DESCRIPTION OF THE EQUIPMENT NOTES
The following summary describes the material terms of the
Equipment Notes. The summary makes use of terms defined in, and
is qualified in its entirety by reference to all of the
provisions of, the Equipment Notes, the Indentures and the
Participation Agreements, each of which will be filed as an
exhibit to a Current Report on
Form 8-K
to be filed by Southwest with the Commission. Except as
otherwise indicated, the following summaries relate to the
Equipment Notes, the Indenture and the Participation Agreement
that may be applicable to each Aircraft.
Under the terms of the Participation Agreement for each Aircraft
between Southwest and Wilmington Trust Company, as
Indenture Trustee, Subordination Agent and Trustee for each
Trust (each, a Participation Agreement), subject to
certain customary conditions precedent, each Trustee will
purchase from Southwest the Equipment Notes to be issued under
the Indenture related to that Aircraft. Equipment Notes will be
issued in two series with respect to each Aircraft (the
Series A Equipment Notes and the
Series B Equipment Notes (collectively, the
Equipment Notes)). Southwest may elect to issue one
or more series of Additional Equipment Notes with respect to an
Aircraft at any time or from time to time, which will be funded
from sources other than this Offering. See Possible
Issuance of Additional Certificates and Refinancing of
Certificates. The Equipment Notes with respect to each
Aircraft will be issued under a separate Indenture between
Southwest and Wilmington Trust Company, as indenture
trustee thereunder (each, a Loan Trustee). The
Indentures will not provide for defeasance, or discharge upon
deposit of cash or certain obligations of the United States,
notwithstanding the description of defeasance in the Prospectus.
Southwests obligations under the Equipment Notes will be
general obligations of Southwest.
The Indentures provide for the following subordination
provisions applicable to the Equipment Notes:
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Series A Equipment Notes issued in respect of an Aircraft
will rank senior in right of payment to other Equipment Notes
issued in respect of such Aircraft.
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Series B Equipment Notes issued in respect of an Aircraft
will rank junior in right of payment to the Series A
Equipment Notes issued in respect of such Aircraft.
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If Southwest elects to issue Additional Equipment Notes with
respect to an Aircraft, they will be subordinated in right of
payment to the Series A and Series B Equipment Notes
issued with respect to such Aircraft. See Possible
Issuance of Additional Certificates and Refinancing of
Certificates.
Principal and Interest Payments
Subject to the provisions of the Intercreditor Agreement,
interest paid on the Equipment Notes held in each Trust will be
passed through to the Certificateholders of such Trust on the
dates and at the rate per annum set forth on the cover page of
this Prospectus Supplement with respect to Certificates issued
by such Trust until the final expected Regular Distribution Date
for such Trust. Subject to the provisions of the Intercreditor
Agreement, principal paid on the Equipment Notes held in each
Trust will be passed through to the Certificateholders of such
Trust in scheduled amounts on the dates set forth in
Appendix III to this Prospectus Supplement until the final
expected Regular Distribution Date for such Trust.
Interest will be payable on the unpaid principal amount of each
Equipment Note at the rate applicable to such Equipment Note on
February 1 and August 1 of each year, commencing on the
February 1, 2008. Such interest will be computed on the
basis of a
360-day year
of twelve
30-day
months.
Scheduled principal payments on the Series A and
Series B Equipment Notes will be made on February 1 and
August 1 in certain years, commencing on February 1, 2008.
See Description of the CertificatesPool
Factors for a discussion of the scheduled payments of
principal of the Equipment Notes and possible revisions thereto.
The Final Maturity Date for the Class A
Certificates is February 1, 2024 and for Class B
Certificates is August 1, 2022.
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If any date scheduled for a payment of principal, premium (if
any) or interest with respect to the Equipment Notes is not a
Business Day, such payment will be made on the next succeeding
Business Day, without any additional interest.
If an Event of Loss occurs with respect to an Aircraft and such
Aircraft is not replaced by Southwest under the related
Indenture, the Equipment Notes issued with respect to such
Aircraft will be redeemed, in whole, in each case at a price
equal to the aggregate unpaid principal amount thereof, together
with accrued interest thereon to, but not including, the date of
redemption, but without premium, on a Special Distribution Date.
(Indentures, Section 2.10)
All of the Equipment Notes issued with respect to an Aircraft
may be redeemed prior to maturity at any time, at the option of
Southwest. Southwest may also elect to redeem (i) the
Series B Equipment Notes with respect to all Aircraft in
connection with a refinancing of such Series or (ii) the
Series B Equipment Notes with respect to all (but not less
than all) Aircraft without issuing any new equipment notes;
provided, that, in the case of a redemption described in the
preceding clause (ii) the Series B Equipment Notes may
be so redeemed only if the Rating Agencies have provided a
confirmation that such redemption will not result in a
withdrawal, suspension or downgrading of the ratings on any
Class of Certificates then rated by the Rating Agencies that
will remain outstanding. The redemption price in the case of any
optional redemption of Equipment Notes will be equal to the
aggregate unpaid principal amount thereof, together with accrued
and unpaid interest thereon to, but not including, the date of
redemption, plus a Make-Whole Premium. (Indentures,
Section 2.11)
Make-Whole Premium means, with respect to any
Equipment Note, an amount (as determined by an independent
investment bank of national standing) equal to the excess, if
any, of (a) the present value of the remaining scheduled
payments of principal and interest to maturity of such Equipment
Note computed by discounting such payments on a semiannual basis
on each payment date under the applicable Indenture (assuming a
360-day year
of twelve
30-day
months) using a discount rate equal to the Treasury Yield plus
the applicable Make-Whole Spread over (b) the outstanding
principal amount of such Equipment Note plus accrued interest to
the date of determination. The Make-Whole Spread
applicable to each Series of Equipment Notes is set forth below:
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Make-Whole
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Spread
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Series A Equipment Notes
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%
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Series B Equipment Notes
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%
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For purposes of determining the Make-Whole Premium,
Treasury Yield means, at the date of determination
with respect to any Equipment Note, the interest rate (expressed
as a decimal and, in the case of United States Treasury bills,
converted to a bond equivalent yield) determined to be the per
annum rate equal to the semiannual yield to maturity for United
States Treasury securities maturing on the Average Life Date of
such Equipment Note and trading in the public securities markets
either as determined by interpolation between the most recent
weekly average yield to maturity for two series of United States
Treasury securities trading in the public securities markets,
(A) one maturing as close as possible to, but earlier than,
the Average Life Date of such Equipment Note and (B) the
other maturing as close as possible to, but later than, the
Average Life Date of such Equipment Note, in each case as
published in the most recent H.15(519) or, if a weekly average
yield to maturity for United States Treasury securities maturing
on the Average Life Date of such Equipment Note is reported in
the most recent H.15(519), such weekly average yield to maturity
as published in such H.15(519). H.15(519) means the
weekly statistical release designated as such, or any successor
publication, published by the Board of Governors of the Federal
Reserve System. The date of determination of a Make-Whole
Premium shall be the third Business Day prior to the applicable
payment or redemption date and the most recent
H.15(519) means the H.15(519) published prior to the close
of business on the third Business Day prior to the applicable
payment or redemption date.
Average Life Date for any Equipment Note shall be
the date which follows the time of determination by a period
equal to the Remaining Weighted Average Life of such Equipment
Note. Remaining Weighted Average Life on a given
date with respect to any Equipment Note shall be the number of
days equal to the quotient obtained by dividing (a) the sum
of each of the products obtained by multiplying (i) the
amount of each then remaining
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scheduled payment of principal of such Equipment Note by
(ii) the number of days from and including such
determination date to but excluding the date on which such
payment of principal is scheduled to be made, by (b) the
then outstanding principal amount of such Equipment Note.
Aircraft
The Equipment Notes issued with respect to each Aircraft will be
secured by a security interest in such Aircraft and each of the
other Aircraft for which Equipment Notes are outstanding and an
assignment to the Loan Trustee of certain of Southwests
rights under its purchase agreements with Boeing and the
Aircraft engine manufacturer. Any cash collateral held as a
result of the cross-collateralization of the Equipment Notes
would not be entitled to the benefits of Section 1110.
Since the Equipment Notes are cross-collateralized, any proceeds
from the sale of an Aircraft securing Equipment Notes or other
exercise of remedies under an Indenture with respect to such
Aircraft will (subject to the provisions of the
U.S. Bankruptcy Code) be available for application to
shortfalls with respect to obligations due under the other
Equipment Notes at the time such proceeds are received. In the
absence of any such shortfall, excess proceeds will be held as
additional collateral by the Loan Trustee under such Indenture
for such other Equipment Notes.
The only cross-default in the Indentures is if (x) all
amounts owing under any Equipment Note issued under another
Indenture are not paid in full on or before the Final Payment
Date, and (y) any such failure shall continue unremedied
for a period of twenty (20) Business Days thereafter.
Therefore, prior to the triggering of the cross-default, if the
Equipment Notes issued under one or more Indentures are in
default and the Equipment Notes issued under the remaining
Indentures are not in default, no remedies will be exercisable
under such remaining Indentures. So long as no Related Payment
Default or an Indenture Default under any other Indenture has
occurred and is continuing, if (x) Southwest exercises its
right to redeem all the Equipment Notes under an Indenture or
(y) in any other circumstances, all the Equipment Notes
under an Indenture are paid in full, the Aircraft subject to the
lien of such Indenture would be released. Related Payment
Default means, with respect to an Indenture, the failure
by Southwest to pay (i) any amount of principal of or
interest on any Equipment Note issued under any other related
Indenture when due or (ii) any obligation(s) secured by any
other Indenture (other than principal or interest on the
Equipment Notes) in excess, either individually or in the
aggregate, of $25,000 under any such Indenture when due. Once
the lien on an Aircraft is released, that Aircraft will no
longer secure the amounts owing under the other Indentures. In
addition, if an Equipment Note ceases to be held by the
Subordination Agent (as a result of sale upon the exercise of
remedies, the exercise by Certificateholders of their right to
buy Equipment Notes or otherwise), it ceases to be entitled to
the benefits of cross-collateralization. After any exercise by
Certificateholders of their right to buy Equipment Notes under
any Indenture, the remaining Equipment Notes issued under such
Indenture that continue to be held by the Subordination Agent
will continue to be entitled to the benefits of
cross-collateralization.
The tables in Appendix III show the loan to Aircraft value
ratios for the Equipment Notes issued for each Aircraft as of
the Issuance Date and each Regular Distribution Date. The LTVs
for each Aircraft were obtained by dividing (i) the
outstanding balance (assuming no payment default) of the related
Equipment Notes determined immediately after giving effect to
the payments scheduled to be made on each such Regular
Distribution Date by (ii) the assumed value (the
Assumed Aircraft Value) of the Aircraft securing
such Equipment Notes. The tables assume that (i) no
prepayments of interest or principal on the Equipment Notes will
occur and (ii) no payment default shall have occurred and
be continuing with respect to the Equipment Notes.
The tables in Appendix III are based on the assumption that
the base value of each Aircraft set forth opposite the initial
Regular Distribution Date included in the table depreciates by
approximately 3% of the initial appraised base value each year
for the first 15 years after the year of delivery of the
Aircraft by the manufacturer and by approximately 4% each year
after that. Other rates or methods of depreciation would result
in materially different loan to aircraft value ratios, and no
assurance can be given (i) that the depreciation rates and
method assumed for the purposes of the tables are the ones most
likely to occur or (ii) as to the actual future value of
any Aircraft. Thus the tables should not be considered a
forecast or prediction of expected or likely loan to Aircraft
value ratios, but simply a mathematical calculation based on one
set of assumptions.
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Cash
Cash, if any, held from time to time by the Loan Trustee with
respect to any Aircraft, including funds held as the result of
an Event of Loss to such Aircraft, will be invested and
reinvested by such Loan Trustee, at the direction of Southwest,
in investments described in the related Indenture. (Indentures,
Section 6.06)
Except as otherwise provided in the Indentures, each Loan
Trustee, in its individual capacity, will not be answerable or
accountable under the Indentures or under the Equipment Notes
under any circumstances except, among other things, for its own
willful misconduct or gross negligence. (Indentures,
Section 7.01)
Indenture Defaults, Notice and Waiver
Indenture Defaults under each Indenture will include:
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The failure by Southwest to pay any amount, when due, under such
Indenture or under any Equipment Note issued thereunder that
continues for more than ten Business Days, in the case of
principal, interest or Make-Whole Premium.
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Any representation or warranty made by Southwest in such
Indenture, the related Participation Agreement or certain
related documents furnished to the Loan Trustee or any holder of
an Equipment Note pursuant thereto being false or incorrect in
any material respect when made that continues to be material and
adverse to the interests of the Loan Trustee or registered
holders of Equipment Notes (Note Holders) and
remains unremedied after notice and specified cure periods.
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Failure by Southwest to perform or observe any covenant or
obligation for the benefit of the Loan Trustee or holders of
Equipment Notes under such Indenture or certain related
documents that continues after notice and specified cure periods.
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The lapse or cancellation of insurance required under such
Indenture.
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The occurrence of certain events of bankruptcy, reorganization
or insolvency of Southwest (without giving effect to any
applicable grace period, a Bankruptcy Default).
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The failure by Southwest to pay any amounts secured by any other
Indenture that are due and payable on or before the Final
Payment Date, and the continuance of such failure for twenty
(20) Business Days. (Indentures, Section 5.01)
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The only cross-default provision in the Indentures is an event
of default under each Indenture which occurs if (x) any
amounts secured by any other Indenture that are due and payable
on or before the Final Payment Date are not paid in full on or
before such date, and (y) any such failure shall continue
unremedied for a period of twenty (20) Business Days
thereafter. Consequently, prior to the triggering of the
cross-default, events resulting in an Indenture Default under
any particular Indenture may or may not result in an Indenture
Default under any other Indenture. Until the triggering of the
cross-default, if the Equipment Notes issued with respect to one
or more Aircraft are in default and the Equipment Notes issued
with respect to the remaining Aircraft are not in default, no
remedies will be exercisable under the Indentures with respect
to the remaining Aircraft.
The holders of a majority in principal amount of the outstanding
Equipment Notes issued with respect to any Aircraft, by notice
to the Loan Trustee, may on behalf of all the holders waive any
existing default and its consequences under the Indenture with
respect to such Aircraft, except a default in the payment of the
principal of, or premium or interest on any such Equipment Notes
or a default in respect of any covenant or provision of such
Indenture that cannot be modified or amended without the consent
of each holder of Equipment Notes. (Indentures,
Section 5.06) See Description of the Intercreditor
AgreementVoting of Equipment Notes regarding the
persons entitled to direct the vote of Equipment Notes.
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If an Indenture Default (other than a Bankruptcy Default) occurs
and is continuing under an Indenture, the related Loan Trustee
or the holders of a majority in principal amount of the
Equipment Notes outstanding under such Indenture may declare the
principal of all such Equipment Notes issued thereunder
immediately due and payable, together with all accrued but
unpaid interest thereon. If a Bankruptcy Default occurs, such
amounts shall be due and payable without any declaration or
other act on the part of the related Loan Trustee or holders of
Equipment Notes. The holders of a majority in principal amount
of Equipment Notes outstanding under an Indenture may rescind
any declaration of acceleration of such Equipment Notes at any
time before the judgment or decree for the payment of the money
so due shall be entered if (i) there has been paid to the
related Loan Trustee an amount sufficient to pay all principal,
interest and premium, if any, on any such Equipment Notes, to
the extent such amounts have become due otherwise than by such
declaration of acceleration and (ii) all other Indenture
Defaults and incipient Indenture Defaults with respect to any
covenant or provision of such Indenture have been cured.
(Indentures, Section 5.02(b))
Each Indenture provides that if an Indenture Default under such
Indenture has occurred and is continuing, the related Loan
Trustee may exercise certain rights or remedies available to it
under such Indenture or under applicable law.
Until the triggering of the cross-default described in
Indenture Defaults, Notice and Waiver, if the
Equipment Notes issued in respect of one Aircraft are in
default, the Equipment Notes issued in respect of the other
Aircraft may not be in default, and, if not, no remedies will be
exercisable under the applicable Indentures with respect to such
other Aircraft.
In the case of Chapter 11 bankruptcy proceedings in which
an air carrier is a debtor, Section 1110 of the
U.S. Bankruptcy Code (Section 1110)
provides special rights to holders of security interests with
respect to equipment (defined as described below).
Under Section 1110, the right of such holders to take
possession of such equipment in compliance with the provisions
of a security agreement is not affected by any provision of the
U.S. Bankruptcy Code or any power of the bankruptcy court.
Such right to take possession may not be exercised for
60 days following the date of commencement of the
reorganization proceedings. Thereafter, such right to take
possession may be exercised during such proceedings unless,
within the
60-day
period or any longer period consented to by the relevant
parties, the debtor agrees to perform its future obligations and
cures all existing and future defaults on a timely basis.
Defaults resulting solely from the financial condition,
bankruptcy, insolvency or reorganization of the debtor need not
be cured.
Equipment is defined in Section 1110, in part,
as an aircraft, aircraft engine, propeller, appliance, or spare
part (as defined in Section 40102 of Title 49 of the
U.S. Code) that is subject to a security interest granted
by, leased to, or conditionally sold to a debtor that, at the
time such transaction is entered into, holds an air carrier
operating certificate issued pursuant to chapter 447 of
Title 49 of the U.S. Code for aircraft capable of
carrying ten or more individuals or 6,000 pounds or more of
cargo. Rights under Section 1110 are subject to certain
limitations in the case of equipment first placed in service on
or prior to October 22, 1994.
It is a condition to the Trustees obligation to purchase
Equipment Notes with respect to each Aircraft that outside
counsel to Southwest, Vinson & Elkins L.L.P., provide
its opinion to the Trustees that the Loan Trustee will be
entitled to the benefits of Section 1110 with respect to
the airframe and engines comprising such Aircraft, assuming
that, at the time of such transaction, Southwest holds an air
carrier operating certificate issued pursuant to
chapter 447 of Title 49 of the U.S. Code for
aircraft capable of carrying ten or more individuals or 6,000
pounds or more of cargo. For a description of certain
limitations on the Loan Trustees exercise of rights
contained in the Indenture, see Indenture Defaults,
Notice and Waiver.
The opinion of Vinson & Elkins L.L.P. will not address
the possible replacement of an Aircraft after an Event of Loss
in the future, the consummation of which is conditioned upon the
contemporaneous delivery of an opinion of counsel to the effect
that the related Loan Trustee will be entitled to
Section 1110 benefits with respect to such replacement
unless there is a change in law or court interpretation that
results in Section 1110 not being available. See
Certain Provisions of the IndenturesEvents of
Loss. The opinion of Vinson & Elkins L.L.P. will
also not address the availability of Section 1110 with
respect to any possible lessee of an Aircraft if it is leased by
Southwest.
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If an Indenture Default under any Indenture occurs and is
continuing, any sums held or received by the related Loan
Trustee may be applied to reimburse such Loan Trustee for any
tax, expense or other loss incurred by it and to pay any other
amounts due to such Loan Trustee prior to any payments to
holders of the Equipment Notes issued under such Indenture.
(Indentures, Section 3.03)
Modification of Indentures
Without the consent of holders of a majority in principal amount
of the Equipment Notes outstanding under any Indenture, the
provisions of such Indenture and the related Participation
Agreement may not be amended or modified, except to the extent
indicated below.
Without the consent of the Liquidity Provider and the holder of
each Equipment Note outstanding under any Indenture affected
thereby, no amendment or modification of such Indenture may
among other things (a) reduce the principal amount of, or
premium, if any, or interest payable on, any Equipment Notes
issued under such Indenture or change the date on which any
principal, premium, if any, or interest is due and payable,
(b) permit the creation of any security interest with
respect to the property subject to the lien of such Indenture,
except as provided in such Indenture, or deprive any holder of
an Equipment Note issued under such Indenture of the benefit of
the lien of such Indenture upon the property subject thereto or
(c) modify the percentage of holders of Equipment Notes
issued under such Indenture required to take or approve any
action under such Indenture. (Indentures, Section 10.01(a))
Any Indenture may be amended without the consent of the holders
of Equipment Notes to, among other things, cure any defect or
inconsistency in such Indenture or the Equipment Notes issued
thereunder, or make any change not inconsistent with the
Indenture (provided that such change does not adversely affect
the interests of any such holder) or provide for the re-issuance
thereunder of Series B Equipment Notes or the issuance or
re-issuance thereunder of one or more additional series of
equipment notes (and the issuance or re-issuance of equipment
notes of the same designation under other Indentures) and any
related credit support arrangements. See Possible Issuance
of Additional Certificates and Refinancing of
Certificates. (Indentures, Section 10.01(b))
Southwest will be required to indemnify each Loan Trustee, the
Liquidity Provider, the Subordination Agent, and each Trustee,
but not the holders of Certificates, for certain losses, claims
and other matters. (Participation Agreements, Section 8.1)
Certain Provisions of the Indentures
Maintenance
Southwest is obligated under each Indenture, among other things
and at its expense, to keep each Aircraft duly registered and
insured, and to maintain, service, repair and overhaul the
Aircraft so as to keep it in as good an operating condition as
when delivered to Southwest, ordinary wear and tear excepted,
and in such condition as required to maintain the airworthiness
certificate for the Aircraft in good standing at all times.
(Indentures, Section 4.02)
Possession,
Lease and Transfer
Each Aircraft may be operated by Southwest or, subject to
certain restrictions, by certain other persons. Normal
interchange agreements with respect to the Airframe and normal
interchange, pooling and borrowing agreements with respect to
any Engine, in each case customary in the commercial airline
industry, are permitted. Leases are also permitted to
U.S. air carriers and foreign air carriers that have their
principal executive office in certain specified countries,
subject to a reasonably satisfactory legal opinion that, among
other things, such country would recognize the Loan
Trustees security interest in respect of the applicable
Aircraft. In addition, a lessee may not be subject to insolvency
or similar proceedings at the commencement of such lease.
(Indentures, Section 4.02) Permitted foreign air carriers
are not limited to those based in a country that is a party to
the Convention on the International Recognition of Rights in
Aircraft (Geneva 1948) (the Convention) or the Cape
Town Convention on International Interests in Mobile Equipment
and the related Aircraft Equipment Protocol (the Cape Town
Treaty).
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It is uncertain to what extent the relevant Loan Trustees
security interest would be recognized if an Aircraft is
registered or located in a jurisdiction not a party to the
Convention or the Cape Town Treaty. Moreover, in the case of an
Indenture Default, the ability of the related Loan Trustee to
realize upon its security interest in an Aircraft could be
adversely affected as a legal or practical matter if such
Aircraft were registered or located outside the United States.
Registration
Southwest is required to keep each Aircraft duly registered
under the Transportation Code with the FAA and to record each
Indenture and certain other documents under the Transportation
Code. In addition, Southwest is required to register the
international interests created pursuant to the
Indenture under the Cape Town Treaty. (Indentures,
Section 4.02(e)) Such recordation of the Indenture and
certain other documents with respect to each Aircraft will give
the relevant Loan Trustee a first-priority, perfected security
interest in such Aircraft under U.S. law. If such Aircraft
is located outside the United States, under U.S. law the
effect of such perfection and the priority of such security
interest will be governed by the law of the jurisdiction where
such Aircraft is located. The Convention provides that such
security interest will be recognized, with certain limited
exceptions, in those jurisdictions that have ratified or adhere
to the Convention. The Cape Town Treaty provides that a
registered international interest has priority over
a subsequently registered interest and over an unregistered
interest for purposes of the law of those jurisdictions that
have ratified the Cape Town Treaty. There are many jurisdictions
in the world that have not ratified either the Convention or the
Cape Town Treaty, and the Aircraft may be located in any such
jurisdiction from time to time.
So long as no Indenture Default exists, Southwest has the right
to register any Aircraft in a country other than the United
States at its own expense in connection with a permitted lease
of the Aircraft to a permitted foreign air carrier, subject to
certain conditions set forth in the related Participation
Agreement. These conditions include a requirement that an
opinion of counsel be provided that the lien of the applicable
Indenture will continue as a first priority security interest in
the applicable Aircraft. (Indentures, Section 4.02(e);
Participation Agreement, Section 6.4.5)
Liens
Southwest is required to maintain each Aircraft free of any
liens, other than the rights of the relevant Loan Trustee, the
holders of the related Equipment Notes and Southwest arising
under the applicable Indenture or the other operative documents
related thereto, and other than certain limited liens permitted
under such documents, including but not limited to
(i) liens for taxes either not yet delinquent or being
contested in good faith by appropriate proceedings;
(ii) materialmens, mechanics and other similar
liens arising in the ordinary course of business and securing
obligations that either are not yet delinquent for more than
60 days or are being contested in good faith by appropriate
proceedings; (iii) judgment liens so long as such judgment
is discharged or vacated within 60 days or the execution of
such judgment is stayed pending appeal or discharged, vacated or
reversed within 60 days after expiration of such stay;
(iv) salvage or similar rights of insurers under policies
required to be maintained by Southwest under each Indenture; and
(v) any other lien as to which Southwest has provided a
bond or other security adequate in the reasonable opinion of the
Loan Trustee; provided that in the case of each of the liens
described in the foregoing clauses (i), (ii) and (iii),
such liens and proceedings do not involve any material risk of
the sale, forfeiture or loss of such Aircraft or the interest of
the Loan Trustee therein or impair the lien of the relevant
Indenture. (Indentures, Section 4.01)
Replacement
of Parts; Alterations
Southwest is obligated to replace all parts at its expense that
may from time to time be incorporated or installed in or
attached to any Aircraft and that may become lost, damaged
beyond repair, worn out, stolen, seized, confiscated or rendered
permanently unfit for use. Southwest or any permitted lessee has
the right, at its own expense, to make such alterations,
modifications and additions with respect to each Aircraft as it
deems desirable in the proper conduct of its business and to
remove parts which it deems to be obsolete or no longer suitable
or appropriate for use, so long as such alteration,
modification, addition or removal does not materially diminish
the
S-53
fair market value, utility or useful life of the related
Aircraft or Engine or invalidate the Aircrafts
airworthiness certificate. (Indentures, Section 4.04(d))
Insurance
Southwest is required to maintain, at its expense (or at the
expense of a permitted lessee), all-risk aircraft hull insurance
covering each Aircraft, at all times in an amount not less than
the unpaid principal amount of the Equipment Notes relating to
such Aircraft together with six months of interest accrued
thereon (the Debt Balance). However, after giving
effect to self-insurance permitted as described below, the
amount payable under such insurance may be less than such
amounts payable with respect to the Equipment Notes. In the
event of a loss involving insurance proceeds in excess of
$6,000,000 per occurrence in respect of any Aircraft, such
proceeds up to the Debt Balance of the relevant Aircraft will be
payable to the applicable Loan Trustee, for so long as the
relevant Indenture shall be in effect. In the event of a loss
involving insurance proceeds of up to $6,000,000 per occurrence
in respect of any Aircraft, such proceeds will be payable
directly to Southwest so long as no Indenture Default exists
under the related Indenture. So long as the loss does not
constitute an Event of Loss, insurance proceeds will be applied
to repair or replace the property. (Indentures,
Section 4.06 and Annex B)
In addition, Southwest is obligated to maintain comprehensive
airline liability insurance at its expense (or at the expense of
a permitted lessee), including, without limitation, passenger
liability, baggage liability, cargo and mail liability,
hangarkeepers liability and contractual liability
insurance with respect to each Aircraft. Such liability
insurance must be underwritten by insurers of nationally or
internationally recognized responsibility. The amount of such
liability insurance coverage per occurrence may not be less than
the amount of comprehensive airline liability insurance from
time to time applicable to aircraft owned or leased and operated
by Southwest of the same type and operating on similar routes as
such Aircraft. (Indentures, Section 4.06 and Annex B)
Southwest is also required to maintain war-risk, hijacking or
allied perils insurance if it (or any permitted lessee) operates
any Aircraft, Airframe or Engine in any area of recognized
hostilities or if Southwest (or any permitted lessee) maintains
such insurance with respect to other aircraft operated on the
same international routes or areas on or in which the Aircraft
is operated. (Indentures, Section 4.06 and Annex B)
Southwest may self-insure with respect to the Aircraft to the
same extent as it does with respect to, or maintain policies
with deductibles or premium adjustment provisions consistent
with similar provisions applicable to, other comparable aircraft
operated by Southwest; provided, however, that if at any time
Southwests unsecured senior long-term debt securities are
not rated Investment Grade, such self-insurance
shall in no case be in amounts greater than that amount of
self-insurance carried by airlines similarly situated with
Southwest and operating aircraft similar to the Aircraft on
similar routes; and provided further that, in the case of public
liability insurance, such self-insurance shall in no event
exceed $50,000,000. The term Investment Grade means
a rating of Baa3 or higher from Moodys or a
rating from any other nationally recognized bond rating service
equivalent to or better than such a rating.
In respect of each Aircraft, Southwest is required to name as
additional insured parties the Loan Trustees, the holders of the
Equipment Notes and the Liquidity Provider under all liability,
hull and property and war risk, hijacking and allied perils
insurance policies required with respect to such Aircraft. In
addition, the insurance policies will be required to provide
that, in respect of the interests of such additional insured
persons, the insurance shall not be invalidated or impaired by
any act or omission of Southwest, any permitted lessee or any
other person. (Indentures, Section 4.06 and Annex B)
Events
of Loss
If an Event of Loss occurs with respect to the Airframe or the
Airframe and Engines of an Aircraft, Southwest must elect within
45 days after such occurrence either to make payment with
respect to such Event of Loss or to replace such Airframe and
any such Engines. Not later than the first Business Day
following the earlier of (i) the 120th day following
the date of occurrence of such Event of Loss, and (ii) the
fourth Business Day following the receipt of the insurance
proceeds in respect of such Event of Loss, Southwest must either
(i) pay to the Loan Trustee the outstanding principal
amount of the Equipment Notes, together with certain additional
amounts, but, in any case, without any Make-Whole Premium or
(ii) substitute an airframe (or airframe and one or more
engines, as the
S-54
case may be) for the Airframe, or Airframe and Engine(s), that
suffered such Event of Loss. (Indentures, Sections 2.10 and
4.05(a))
If Southwest elects to replace an Airframe (or Airframe and one
or more Engines, as the case may be) that suffered such Event of
Loss, it shall subject such an airframe (or airframe and one or
more engines) to the lien of the Indenture, and such replacement
airframe or airframe and engines must be the same model as the
Airframe or Airframe and Engines to be replaced or an improved
model, with a value, utility and remaining useful life (without
regard to hours or cycles remaining until the next regular
maintenance check) at least equal to the Airframe or Airframe
and Engines to be replaced, assuming that such Airframe or
Airframe and Engines had been maintained in accordance with the
related Indenture. Southwest is also required to provide to the
relevant Loan Trustee reasonably acceptable opinions of counsel
to the effect, among other things, that (i) certain
specified documents have been duly filed under the
Transportation Code and (ii) such Loan Trustee will be
entitled to receive the benefits of Section 1110 with
respect to any such replacement airframe (unless, as a result of
a change in law or court interpretation, such benefits are not
then available). (Indentures, Section 4.05(c))
If Southwest elects not to replace such Airframe, or Airframe
and Engine(s), then upon payment of the outstanding principal
amount of the Equipment Notes issued with respect to such
Aircraft, together with all additional amounts then due and
unpaid with respect to such Aircraft, which must be at least
sufficient to pay in full as of the date of payment thereof the
aggregate unpaid principal amount under such Equipment Notes
together with accrued but unpaid interest thereon and all other
amounts due and owing in respect of such Equipment Notes, the
lien of the Indenture shall terminate with respect to such
Aircraft and the obligation of Southwest thereafter to make
interest and principal payments with respect thereto shall
cease. The payments made under the Indenture by Southwest shall
be deposited with the applicable Loan Trustee. Amounts in excess
of the amounts due and owing under the Equipment Notes issued
with respect to such Aircraft will be distributed by such Loan
Trustee to Southwest. (Indentures, Sections 2.10, 3.02 and
4.05(a)(ii))
If an Event of Loss occurs with respect to an Engine alone,
Southwest will be required to replace such Engine within
60 days after the occurrence of such Event of Loss with
another engine, free and clear of all liens (other than certain
permitted liens). Such replacement engine shall be the same
model as the Engine to be replaced, or an improved model,
suitable for installation and use on the Airframe, and having a
value, utility and remaining useful life (without regard to
hours or cycles remaining until overhaul) at least equal to the
Engine to be replaced, assuming that such Engine had been
maintained in accordance with the relevant Indenture.
(Indentures, Sections 4.04(e) and 4.05)
An Event of Loss with respect to an Aircraft,
Airframe or any Engine means any of the following events with
respect to such property:
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The destruction of such property, damage to such property beyond
economic repair or rendition of such property permanently unfit
for normal use.
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The actual or constructive total loss of such property or any
damage to such property or requisition of title or use of such
property which results in an insurance settlement with respect
to such property on the basis of a total loss or a constructive
or compromised total loss.
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Any theft, hijacking or disappearance of such property for a
period of 180 consecutive days or more.
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Any seizure, condemnation, confiscation, taking or requisition
of title to such property by any governmental entity or
purported governmental entity (other than a Permitted Government
Entity, as defined in the Indentures) for a period exceeding 12
consecutive months.
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As a result of any law, rule, regulation, order or other action
by the FAA or any governmental entity, the use of such property
in the normal course of Southwests business of passenger
air transportation is prohibited for 18 consecutive months,
unless Southwest, prior to the expiration of such
18-month
period, shall have undertaken and shall be diligently carrying
forward steps which are necessary or desirable to permit the
normal use of such property by Southwest, but in any event if
such use shall have been prohibited for a period of three
consecutive years.
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With respect to any Engine, any divestiture of title to such
Engine in connection with pooling or certain other arrangements
shall be treated as an Event of Loss. (Indentures, Annex A)
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S-55
POSSIBLE ISSUANCE OF ADDITIONAL CERTIFICATES AND
REFINANCING OF CERTIFICATES
Issuance of Additional Certificates
Southwest may elect to issue one or more additional series of
equipment notes (the Additional Equipment Notes) at
any time and from time to time after the Issuance Date with
respect to any Aircraft, which will be funded from sources other
than this offering (the Offering) but will be issued
under the same Indenture as the Equipment Notes for such
Aircraft. Any Additional Equipment Note issued under an
Indenture will be subordinated in right of payment to
Series A Equipment Notes and Series B Equipment Notes
issued under such Indenture. Southwest will fund the sale of any
Additional Equipment Notes through the sale of Pass Through
Certificates (the Additional Certificates) issued by
one or more Southwest Airlines Pass Through Trusts (each, an
Additional Trust).
The Trustee of each Additional Trust will become a party to the
Intercreditor Agreement, and the Intercreditor Agreement will be
amended by written agreement of Southwest and the Subordination
Agent to provide for the subordination of the Additional
Certificates to the Administration Expenses, the Liquidity
Obligations, the Class A Certificates and the Class B
Certificates. The priority of distributions under the
Intercreditor Agreement may be revised, however, with respect to
each class of Additional Certificates to provide for
distribution of Adjusted Interest with respect to
each such class of Additional Certificates (calculated in a
manner substantially similar to the calculation of Class B
Adjusted Interest) after Class B Adjusted Interest, but
before Expected Distributions on the Class A Certificates.
Any such issuance of Additional Equipment Notes and Additional
Certificates, and any such amendment of the Intercreditor
Agreement (and any amendment of an Indenture in connection with
such issuance) is contingent upon each Rating Agency providing
written confirmation that such actions will not result in a
withdrawal, suspension, or downgrading of the rating of any
Class of Certificates.
Refinancing of Certificates
Southwest may elect to redeem and re-issue Series B
Equipment Notes (or any series of Additional Equipment Notes)
then outstanding (any such re-issued Equipment Notes, the
Refinancing Equipment Notes) in respect of all (but
not less than all) of the Aircraft. In such case, Southwest will
fund the sale of such Refinancing Equipment Notes through the
sale of Pass Through Certificates (the Refinancing
Certificates) issued by one or more Southwest Airlines
Pass Through Trusts (each, a Refinancing Trust). The
Trustee of each Refinancing Trust will become a party to the
Intercreditor Agreement, and the Intercreditor Agreement will be
amended by written agreement of Southwest and the Subordination
Agent to provide for the subordination of the Refinancing
Certificates to the Administration Expenses, the Liquidity
Obligations, the Class A Certificates and, if applicable,
the Class B Certificates in the same manner that the
corresponding class of refinanced Certificates was subordinated.
Such issuance of Refinancing Equipment Notes and Refinancing
Certificates, and any such amendment of the Intercreditor
Agreement (and any amendment of an Indenture in connection with
such re-issuance) is contingent upon each Rating Agency
providing written confirmation that such actions will not result
in a withdrawal, suspension, or downgrading of the rating of any
Class of Certificates that remains outstanding.
Additional Liquidity Facilities
The Additional Certificates and Refinancing Certificates may
have the benefit of credit support similar to the Liquidity
Facility and claims for fees, interest, expenses, reimbursement
of advances and other obligations arising from such credit
support may rank equally with similar claims in respect of the
Liquidity Facility, so long as the prior written consent of the
Liquidity Provider shall have been obtained and each Rating
Agency shall have provided written confirmation that such
actions will not result in a withdrawal, suspension, or
downgrading of the rating of any Class of Certificates.
S-56
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes certain U.S. federal income
tax considerations to Certificateholders of the purchase,
ownership and disposition of the Certificates and in the opinion
of Vinson & Elkins L.L.P., special tax counsel to
Southwest (Tax Counsel), is accurate in all material
respects with respect to the matters discussed therein. This
summary supplements (and, to the extent inconsistent therewith,
replaces) the summary of U.S. federal income tax
consequences set forth in the Prospectus. Except as otherwise
specified, the summary is addressed to beneficial owners of
Certificates who are individual citizens or residents of the
United States, corporations created or organized in or under the
laws of the United States or any state therein or the District
of Columbia, estates the income of which is subject to
U.S. federal income taxation regardless of its source, or
trusts that meet the following two tests: (a) a
U.S. court is able to exercise primary supervision over the
administration of the trust and (b) one or more
U.S. fiduciaries have the authority to control all
substantial decisions of the trust
(U.S. Persons) that will hold the Certificates
as capital assets (U.S. Certificateholders).
This summary does not address the tax treatment of
U.S. Certificateholders that may be subject to special tax
rules, such as banks, insurance companies, dealers in securities
or commodities, partnerships, holders subject to the
mark-to-market rules, tax-exempt entities, holders that will
hold Certificates as part of a straddle with other investments
or as part of a synthetic security or other
integrated investment (including a conversion
transaction) or holders that have a functional
currency other than the U.S. Dollar, nor, except as
otherwise specified, does it address the tax treatment of
U.S. Certificateholders that do not acquire Certificates at
the public offering price as part of the initial offering. The
summary does not purport to be a comprehensive description of
all of the tax considerations that may be relevant to a decision
to purchase Certificates. This summary does not describe any tax
consequences arising under the laws of any state, locality or
taxing jurisdiction other than the United States.
The summary is based upon the tax laws and practice of the
United States as in effect on the date of this Prospectus
Supplement, as well as judicial and administrative
interpretations thereof (in final or proposed form) available on
or before such date. All of the foregoing are subject to change,
which change could apply retroactively. We have not sought any
ruling from the U.S. Internal Revenue Service (the
IRS) with respect to the tax consequences described
below, and we cannot assure you that the IRS will not take
contrary positions. The Trusts are not indemnified for any
U.S. federal income taxes that may be imposed upon them,
and the imposition of any such taxes on a Trust could result in
a reduction in the amounts available for distribution to the
Certificateholders of such Trust. Prospective investors
should consult their own tax advisors with respect to the
federal, state, local and foreign tax consequences to them of
the purchase, ownership and disposition of the Certificates.
In the opinion of Tax Counsel, while there is no authority
addressing the characterization of entities that are similar to
the Trusts in all material respects, each of the Trusts will be
classified as a grantor trust for U.S. federal income tax
purposes. The Trusts, however, are not indemnified for any
U.S. federal income taxes that may be imposed upon them,
and the imposition of any such taxes on a Trust could result in
a reduction in the amounts available for distribution to the
Certificateholders of such Trust. The discussion below assumes
that the Trusts will be classified as grantor trusts and that
each Trust will file a U.S. federal income tax return and
report to Certificateholders on the basis that is a grantor
trust.
Taxation of Certificateholders Generally
Trusts
Classified as Grantor Trusts
A U.S. Certificateholder will be treated as owning its pro
rata undivided interest in each of the Equipment Notes held by
the Trust and any other property held by the Trust. Accordingly,
each U.S. Certificateholders share of interest paid
on Equipment Notes will be taxable as ordinary income, as it is
paid or accrued, in accordance with such
U.S. Certificateholders method of accounting for
U.S. federal income tax purposes. A
U.S. Certificateholder using the cash method of accounting
must take into account its pro rata share of income as and when
received by the Trustee of the relevant Trust. A
U.S. Certificateholder using the accrual method of
accounting must take into
S-57
account its pro rata share of income as it accrues or is
received by the Trustee of the relevant Trust, whichever is
earlier. Assuming the market discount rules described below do
not apply, a portion of each payment to a
U.S. Certificateholder that is allocable to principal will
represent a recovery of capital which will reduce the basis of
the U.S. Certificateholders interest in the assets of
the related Trust. A U.S. Certificateholders share of
premium, if any, paid on redemption of an Equipment Note will be
treated as capital gain. Any amounts received by a Trust under
the Liquidity Facility in order to make interest payments will
be treated for U.S. federal income tax purposes as having
the same characteristics as the payments they replace.
It is anticipated that the Equipment Notes will not be issued
with original issue discount for U.S. federal income tax
purposes. Under certain aggregation rules set forth in the
Treasury regulations promulgated under the Code, both as in
effect on the date of this prospectus supplement, if one or more
investors purchases a substantial portion of the Certificates
issued by both Trusts, certain of the investors interests
in the Equipment Notes in those Trusts may, in certain
circumstances, be treated as a single debt instrument with a
single issue price, maturity date, stated redemption price at
maturity and yield to maturity. If the aggregation rules apply
to any investors, such Equipment Notes could be treated with
respect to such investors as having been issued with original
issue discount. Generally, a holder of a debt instrument issued
with original issue discount that is not de minimis must
include such original issue discount in income for
U.S. federal income tax purposes as it accrues, in advance
of the receipt of cash attributable to such income, under a
method that takes into account the compounding of interest
income. Certificateholders should consult their own tax advisors
regarding the aggregation rules.
In the case of a subsequent purchaser of a Certificate, the
purchase price for the Certificate should be allocated among the
assets held by the relevant Trust (including the Equipment
Notes) in accordance with their relative fair market values at
the time of purchase.
A U.S. Certificateholder who is treated as purchasing an
interest in an Equipment Note at a market discount (generally,
at a cost less than its remaining principal amount) that exceeds
a statutorily defined de minimis amount will be subject to the
market discount rules of the Code. These rules
provide, in part, that gain on the sale or other disposition of
a debt instrument with a term of more than one year and partial
principal payments (including partial redemptions) on such a
debt instrument are treated as ordinary income to the extent of
accrued but unrecognized market discount. A
U.S. Certificateholder may elect to include market discount
in income currently as it accrues. This election, once made,
applies to all market discount obligations acquired during or
after the first taxable year to which the election applies, and
may not be revoked without the consent of the IRS. The market
discount rules also provide for deferral of interest deductions
with respect to debt incurred to purchase or carry a debt
instrument that has market discount, unless an election to
include market discount on a current basis is made. A
U.S. Certificateholder who purchases an interest in an
Equipment Note at a premium may elect to amortize the premium
(generally on a constant yield basis) as an offset to interest
income on the Equipment Note under rules prescribed by the Code
and the Treasury regulations, with corresponding reductions in
such Certificateholders tax basis in the relevant
Equipment Note. It is unclear how these rules apply to an
Equipment Note when there is more than one possible redemption
date and the amount of the redemption premium is uncertain.
Certificateholders should consult their own tax advisors
regarding the advisability and consequences of the election to
amortize bond premium with respect to the Equipment Notes.
Each U.S. Certificateholder will be entitled to deduct,
consistent with its method of accounting, its pro rata share of
fees and expenses paid or incurred by the corresponding Trust as
provided in Section 162 or 212 of the Code. Certain fees
and expenses, including fees paid to the Trustee and the
Liquidity Provider, will be borne by parties other than the
Certificateholders. It is possible that such fees and expenses
will be treated as constructively received by the Trust, in
which event a U.S. Certificateholder will be required to
include in income and will be entitled to deduct its pro rata
share of such fees and expenses. If a
U.S. Certificateholder is an individual, estate or trust,
the deduction for such holders share of such fees or
expenses will be allowed only to the extent that all of such
holders miscellaneous itemized deductions, including such
holders share of such fees and expenses, exceed 2% of such
holders adjusted gross income. In addition, in the case of
U.S. Certificateholders who are individuals, certain
otherwise allowable itemized deductions will be subject
generally to additional limitations on itemized deductions under
applicable provisions of the Code.
S-58
Effect of Subordination on Subordinated Creditors
In the event that the Class B Trust (such Trust being the
Subordinated Trust and the related Certificates
being the Subordinated Certificates) receives less
than the full amount of the interest, principal or premium paid
with respect to the Equipment Notes held by it (a
Shortfall Amount) because of the subordination of
the Subordinated Trust under the Intercreditor Agreement, the
corresponding owners of beneficial interests in the Subordinated
Certificates (the Subordinated Certificateholders)
would probably be treated for federal income tax purposes as if
they had:
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received as distributions their full share of interest,
principal or premium;
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paid over to the preferred class of Certificateholders an amount
equal to their share of such Shortfall Amount; and
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retained the right to reimbursement of such amounts to the
extent of future amounts payable to them on account of such
Shortfall Amount.
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Under this analysis:
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Subordinated Certificateholders incurring a Shortfall Amount
would be required to include as current income any interest or
other income of the Subordinated Trust that was a component of
the Shortfall Amount, even though that amount was in fact paid
to a preferred class of certificateholders;
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a loss would only be allowed to Subordinated Certificateholders
when their right to receive reimbursement of the Shortfall
Amount becomes worthless (i.e., when it becomes clear
that funds will not be available from any source to reimburse
such loss); and
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reimbursement of such Shortfall Amount before a claim of
worthlessness would not be taxable income to the Subordinated
Certificateholders because the amount reimbursed would have been
previously included in income.
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These results should not significantly affect the inclusion of
income for Subordinated Certificateholders on the accrual method
of accounting, but could accelerate inclusion of income to
Subordinated Certificateholders on the cash method of accounting
by, in effect, placing them on the accrual method.
Sale or Other Disposition of the Certificates
Upon the sale, exchange or other disposition of a Certificate, a
U.S. Certificateholder generally will recognize capital
gain or loss (subject to the possible recognition of ordinary
income under the market discount rules) equal to the difference
between the amount realized on the disposition (other than any
amount attributable to accrued interest which will be taxable as
ordinary income) and the U.S. Certificateholders
adjusted tax basis in the Equipment Notes and any other property
held by the corresponding Trust. Any such gain or loss will be
long-term capital gain or loss to the extent attributable to
property held by the Trust for more than one year. In the case
of individuals, estates and trusts, the maximum rate of tax on
net long-term capital gains generally is 15%. After
December 31, 2010, this maximum rate is scheduled to return
to the previous maximum rate of 20%. Short-term capital gains
for such taxpayers are taxed at ordinary income rates. Capital
gains recognized by corporate taxpayers are subject to tax at
ordinary corporate income tax rates.
Foreign Certificateholders
Subject to the discussion of backup withholding below, payments
of principal and interest on the Equipment Notes to, or on
behalf of, any beneficial owner of a Certificate that is not a
U.S. Person (a
non-U.S. Certificateholder)
will not be subject to U.S. federal withholding tax
provided that:
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the
non-U.S. Certificateholder
does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of Southwest;
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S-59
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the
non-U.S. Certificateholder
is not a bank receiving interest pursuant to a loan agreement
entered into in the ordinary course of its trade or business, or
a controlled foreign corporation for U.S. tax purposes that
is related to Southwest; and
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either (i) the
non-U.S. Certificateholder
certifies, under penalties of perjury, that it is not a
U.S. person and provides its name and address, or
(ii) a securities clearing organization, bank or other
financial institution that holds customers securities in
the ordinary course of its trade or business (financial
institution) and holds the Certificate certifies, under
penalties of perjury, that such statement has been received from
the
non-U.S. Certificateholder
by it or by another financial institution and furnishes the
payor with a copy thereof.
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In the event that a
non-U.S. Certificateholder
is described in either of the first two bullet points, or fails
to provide the certificate or to satisfy the alternative
procedure described in the third bullet point, withholding tax
would apply at a rate of 30% or such lower rate as may be
provided by an applicable income tax treaty. Southwest has no
obligation to indemnify any Certificateholder with respect to
any withholding taxes. Hence, any such withholding tax will
reduce amounts otherwise distributable to a
non-U.S. Certificateholder.
Any capital gain realized upon the sale, exchange, retirement or
other disposition of a Certificate or upon receipt of premium
paid on an Equipment Note by a
non-U.S. Certificateholder
will not be subject to U.S. federal income or withholding
taxes if (i) such gain is not effectively connected with a
U.S. trade or business of the holder and (ii) in the
case of an individual, such holder is not present in the United
States for 183 days or more in the taxable year of the
sale, exchange, retirement or other disposition or receipt.
Any interest or gain described in the preceding two paragraphs
will be subject to regular U.S. federal net income tax at
graduated rates (and in certain cases, a branch profits tax) if
it is effectively connected with the conduct of a
U.S. trade or business by a
non-U.S. Certificateholder.
Non-U.S. Certificateholders
should consult their own tax advisors regarding the withholding,
income and other tax consequences to them of the purchase,
ownership and disposition of the pass through certificates under
U.S. federal, state and local, and other relevant, law in
light of their own particular circumstances.
Payments made on the Certificates and proceeds from the sale of
Certificates will not be subject to a backup withholding tax
(currently at the rate of 28%) unless, in general, the
Certificateholder fails to comply with certain reporting
procedures or otherwise fails to establish an exemption from
such tax under applicable provisions of the Code.
Back-up
withholding is not an additional tax. Any amount withheld under
back-up
withholding rules may be refunded or credited against a
Certificateholders U.S. federal income tax liability,
if any, provided that the required information is provided to
the IRS.
The foregoing summary of certain U.S. federal income tax
consequences is for general information only and is not tax
advice. Accordingly, purchasers of Certificates should consult
their own tax advisor as to the tax consequences of the
purchase, ownership and disposition of the Certificates
including the applicability and effect of any state, local and
foreign tax laws, and of any proposed changes in applicable
law.
S-60
The Trustee is a Delaware banking corporation with its corporate
trust office in Delaware. In the opinion of Morris James LLP,
Wilmington, Delaware, counsel to the Trustee, under currently
applicable law, assuming that the Trusts will not be taxable as
corporations, but, rather, will be classified as grantor trusts
under subpart E, Part I of Subchapter J of the Code or as
partnerships under Subchapter K of the Code, (i) the Trusts
will not be subject to any tax (including, without limitation,
net or gross income, tangible or intangible property, net worth,
capital, franchise or doing business tax), fee or other
governmental charge under the laws of the State of Delaware or
any political subdivision thereof and
(ii) Certificateholders that are not residents of or
otherwise subject to tax in Delaware will not be subject to any
tax (including, without limitation, net or gross income,
tangible or intangible property, net worth, capital, franchise
or doing business tax), fee or other governmental charge under
the laws of the State of Delaware or any political subdivision
thereof as a result of purchasing, holding (including receiving
payments with respect to) or selling a Certificate.
Neither the Trusts nor the Certificateholders will be
indemnified for any state or local taxes imposed on them, and
the imposition of any such taxes on a Trust could result in a
reduction in the amounts available for distribution to the
Certificateholders of such Trust. In general, should a
Certificateholder or any Trust be subject to any state or local
tax which would not be imposed if the Trustee were located in a
different jurisdiction in the United States, the Trustee will
resign and a new Trustee in such other jurisdiction will be
appointed.
S-61
CERTAIN ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
(ERISA), imposes certain requirements on employee
benefit plans subject to Title I of ERISA (ERISA
Plans), and on those persons who are fiduciaries with
respect to ERISA Plans. Investments by ERISA Plans are subject
to ERISAs general fiduciary requirements, including, but
not limited to, the requirement of investment prudence and
diversification and the requirement that an ERISA Plans
investments be made in accordance with the documents governing
the Plan.
Section 406 of ERISA and Section 4975 of the Code
prohibit certain transactions involving the assets of an ERISA
Plan (as well as those plans that are not subject to ERISA but
which are subject to Section 4975 of the Code, such as
individual retirement accounts (together with ERISA Plans,
Plans)) and certain persons (referred to as
parties in interest or disqualified
persons) having certain relationships to such Plans,
unless a statutory or administrative exemption is applicable to
the transaction. A party in interest or disqualified person who
engages in a prohibited transaction may be subject to excise
taxes and other penalties and liabilities under ERISA and the
Code.
The Department of Labor has promulgated a regulation,
29 CFR
Section 2510.3-101
(the Plan Asset Regulation), describing what
constitutes the assets of a Plan with respect to the Plans
investment in an entity for purposes of ERISA and
Section 4975 of the Code. Under the Plan Asset Regulation,
if a Plan invests (directly or indirectly) in a Certificate, the
Plans assets will include both the Certificate and an
undivided interest in each of the underlying assets of the
corresponding Trust, including the Equipment Notes held by such
Trust, unless it is established that equity participation in the
Trust by benefit plan investors (including but not limited to
Plans and entities whose underlying assets include Plan assets
by reason of an employee benefit plans investment in the
entity) is not significant within the meaning of the
Plan Asset Regulation. In this regard, the extent to which there
is equity participation in a particular Trust by, or on behalf
of, employee benefit plans will not be monitored. If the assets
of a Trust are deemed to constitute the assets of a Plan,
transactions involving the assets of such Trust could be subject
to the prohibited transaction provisions of ERISA and
Section 4975 of the Code unless a statutory or
administrative exemption is applicable to the transaction.
The fiduciary of a Plan that proposes to purchase and hold any
Certificates should consider, among other things, whether such
purchase and holding may involve (i) the direct or indirect
extension of credit to a party in interest or a disqualified
person, (ii) the sale or exchange of any property between a
Plan and a party in interest or a disqualified person, and
(iii) the transfer to, or use by or for the benefit of, a
party in interest or a disqualified person, of any Plan assets.
Such parties in interest or disqualified persons could include,
without limitation, Southwest and its affiliates, the
Underwriters, the Loan Trustees, the Trustees and the Liquidity
Provider. In addition, whether or not the assets of a Trust are
deemed to be Plan assets under the Plan Asset Regulation, if
Certificates are purchased by a Plan and Certificates of a
subordinate Class are held by a party in interest or a
disqualified person with respect to such Plan, the exercise by
the holder of the subordinate Class of Certificates of its right
to purchase the senior Classes of Certificates upon the
occurrence and during the continuation of a Certificate Buyout
Event could be considered to constitute a prohibited transaction
unless a statutory or administrative exemption were applicable.
Depending on the identity of the Plan fiduciary making the
decision to acquire or hold Certificates on behalf of a Plan,
Prohibited Transaction Class Exemption (PTCE)
91-38
(relating to investments by bank collective investment funds),
PTCE 84-14
(relating to transactions effected by a qualified
professional asset manager),
PTCE 95-60
(relating to investments by an insurance company general
account),
PTCE 96-23
(relating to transactions directed by an in-house professional
asset manager) or
PTCE 90-1
(relating to investments by insurance company pooled separate
accounts) (collectively, the Class Exemptions) could
provide an exemption from the prohibited transaction provisions
of ERISA and Section 4975 of the Code. However, there can
be no assurance that any of these Class Exemptions or any other
exemption will be available with respect to any particular
transaction involving the Certificates.
Governmental plans and certain church plans, while not subject
to the fiduciary responsibility provisions of ERISA or the
prohibited transaction provisions of ERISA and Section 4975
of the Code, may nevertheless be subject to state or other
federal laws that are substantially similar to the foregoing
provisions of ERISA and the Code. Fiduciaries of any such plans
should consult with their counsel before purchasing any
Certificates.
Any Plan fiduciary which proposes to cause a Plan to purchase
any Certificates should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited
transaction provisions of ERISA and
S-62
Section 4975 of the Code to such an investment, and to
confirm that such purchase and holding will not constitute or
result in a non-exempt prohibited transaction or any other
violation of an applicable requirement of ERISA.
In addition to the Class Exemptions referred to above, an
individual exemption may apply to the purchase, holding and
secondary market sale of Class A Certificates by Plans,
provided that certain specified conditions are met. In
particular, the Department of Labor has issued individual
administrative exemptions to each of the Underwriters which are
substantially the same as the administrative exemptions issued
to Morgan Stanley & Co. Incorporated, Prohibited
Transaction
Exemption 90-24
(55 Fed. Reg. 20,548 (1990)), as amended (together, the
Underwriter Exemption). The Underwriter Exemption
generally exempts from the application of certain, but not all,
of the prohibited transaction provisions of Section 406 of
ERISA and Section 4975 of the Code certain transactions
relating to the initial purchase, holding and subsequent
secondary market sale of pass through certificates which
represent an interest in a trust that holds secured credit
instruments that bear interest or are purchased at a discount in
transactions by or between business entities (including
equipment notes secured by aircraft or leases of aircraft) and
certain other assets, provided that certain conditions set forth
in the Underwriter Exemption are satisfied.
The Underwriter Exemption sets forth a number of general and
specific conditions which must be satisfied for a transaction
involving the initial purchase, holding or secondary market sale
of certificates representing a beneficial ownership interest in
a trust to be eligible for exemptive relief thereunder. In
particular, the Underwriter Exemption requires that the
acquisition of certificates by a Plan be on terms that are at
least as favorable to the Plan as they would be in an
arms-length transaction with an unrelated party; the
rights and interests evidenced by the certificates not be
subordinated to the rights and interests evidenced by other
certificates of the same trust estate; the certificates at the
time of acquisition by the Plan be rated in one of the three
highest generic rating categories by Moodys,
Standard & Poors, Duff & Phelps, LLC
or Fitch Ratings; and the investing Plan be an accredited
investor as defined in Rule 501(a)(1) of Regulation D
of the Commission under the Securities Act of 1933, as amended.
There can be no assurance that the Department of Labor would
determine that the Underwriter Exemption would be applicable to
Class A Certificates in these circumstances. In addition,
even if all of the conditions of the Underwriter Exemption are
satisfied with respect to the Class A Certificates, no
assurance can be given that the Underwriter Exemption would
apply with respect to all transactions involving the
Class A Certificates or the assets of the Class A
Trust. In particular, it appears that the Underwriter Exemption
would not apply to the purchase by Class B
Certificateholders of Class A Certificates in connection
with the exercise of their rights upon the occurrence and during
the continuance of a Certificate Buyout Event. Therefore, the
fiduciary of a Plan considering the purchase of a Class A
Certificate should consider the availability of the exemptive
relief provided by the Underwriter Exemption, as well as the
availability of any other exemptions that may be applicable,
such as the Class Exemptions.
Transactions involving the Class B Certificates would not
be eligible for the Underwriter Exemption. Therefore, the
fiduciary of a Plan considering the purchase of a Class B
Certificate should consider the availability of other
exemptions, such as the Class Exemptions.
Each person who acquires or accepts a Certificate or an interest
therein, will be deemed by such acquisition or acceptance to
have represented and warranted that either: (i) no Plan
assets have been used to purchase or hold such Certificate or an
interest therein or (ii) the purchase and holding of such
Certificate or an interest therein are exempt from the
prohibited transaction restrictions of ERISA and the Code
pursuant to one or more prohibited transaction statutory or
administrative exemptions. (Trust Supplements,
Section 1.01(d))
S-63
Under the terms and subject to the conditions contained in an
underwriting agreement dated September , 2007
between Southwest and Morgan Stanley & Co.
Incorporated and Citigroup Global Markets Inc., as
representatives of the underwriters listed below (collectively,
the Underwriters), Southwest has agreed to cause
each Trust to sell to the Underwriters, and the Underwriters
have agreed to purchase, the following respective principal
amounts of the Class A and Class B Certificates.
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|
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|
|
|
|
|
|
|
|
Principal Amount
|
|
|
Principal Amount
|
|
|
|
of Class A
|
|
|
of Class B
|
|
Underwriter
|
|
Certificates
|
|
|
Certificates
|
|
|
Morgan Stanley & Co.
Incorporated
|
|
$
|
|
|
|
$
|
|
|
Citigroup Global Markets Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
412,100,000
|
|
|
$
|
87,900,000
|
|
|
|
|
|
|
|
|
|
|
The underwriting agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and
that the Underwriters are obligated to purchase all of the
Certificates if any are purchased. If an Underwriter defaults on
its purchase commitment, the purchase commitments of
non-defaulting Underwriters may be increased or the offering of
Certificates may be terminated.
The aggregate proceeds from the sale of the Certificates will be
$500,000,000. Southwest will pay the Underwriters a commission
of $ . Southwest estimates that its
expenses associated with the offer and sale of the Certificates
will be approximately $1,500,000.
The Underwriters propose to offer the Certificates initially at
the public offering prices on the cover page of this Prospectus
Supplement and selling group members at those prices less the
concessions set forth below. The Underwriters and selling group
members may allow a discount to other broker/dealers set forth
below. After the initial public offering, the public offering
prices and concessions and discounts may be changed by the
Underwriters.
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|
|
|
|
|
|
|
|
Concession to
|
|
|
|
|
|
|
Selling
|
|
|
Discount to
|
|
|
|
Group Members
|
|
|
Broker/Dealers
|
|
|
Class A
|
|
|
|
%
|
|
|
|
%
|
Class B
|
|
|
|
|
|
|
|
|
The Certificates of each series are a new issue of securities
with no established trading market. Southwest does not intend to
apply for the listing of the Certificates on a national
securities exchange. The Underwriters have advised Southwest
that one or more of the Underwriters currently intend to make a
market in the Certificates, as permitted by applicable laws and
regulations. The Underwriters are not obligated, however, to
make a market in the Certificates and any such market making may
be discontinued at any time at their sole discretion.
Accordingly, no assurance can be given as to the liquidity of
the trading market for the Certificates.
Southwest has agreed to indemnify the Underwriters against
certain liabilities including liabilities under the Securities
Act of 1933, as amended, or contribute to payments which the
Underwriters may be required to make in that respect.
From time to time, the Underwriters or their affiliates have
performed and are performing investment banking and advisory
services for, and have provided and are providing general
financing, commercial and investment banking services to,
Southwest and its affiliates. In particular, affiliates of each
of the Underwriters are lenders to Southwest under its revolving
credit facility. BNP Paribas, the Liquidity Provider, is also a
lender to Southwest under its revolving credit facility.
S-64
Southwest expects that delivery of the Certificates will be made
against payment therefor on or about the closing date specified
on the cover page of this Prospectus Supplement, which will be
the business day
following the date hereof (this settlement cycle being referred
to as T+ ). Under
Rule 15c6-1
of the Commission under the Securities Exchange Act of 1934,
trades in the secondary market generally are required to settle
in three business days, unless the parties to the trade
expressly agree otherwise. Accordingly, purchasers who wish to
trade Certificates on the date hereof or the next
succeeding business
days will be required, by virtue of the fact that the
Certificates initially will settle in
T+ , to specify an
alternate settlement cycle at the time of any trade to prevent a
failed settlement and should consult their own advisor.
To facilitate the offering of the Certificates, the Underwriters
may engage in transactions that stabilize, maintain or otherwise
affect the price of the Certificates. Specifically, the
Underwriters may overallot in connection with the offering,
creating a short position in the Certificates for their own
account. In addition, to cover overallotments or to stabilize
the price of the Certificates, the Underwriters may bid for, and
purchase, Certificates in the open market. Finally, the
Underwriters may reclaim selling concessions allowed to an agent
or a dealer for distributing Certificates in the Offering, if
the Underwriters repurchase previously distributed Certificates
in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Certificates
above independent market levels. The Underwriters are not
required to engage in these activities, and may end any of these
activities at any time.
S-65
NOTICE TO CANADIAN RESIDENTS
The distribution of the Certificates in Canada is being made
only on a private placement basis exempt from the requirement
that Southwest prepare and file a prospectus with the securities
regulatory authorities in each province where trades of the
Certificates are made. Any resale of the Certificates in Canada
must be made under applicable securities laws which will vary
depending on the relevant jurisdiction, and which may require
resales to be made under available statutory exemptions or under
a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek
legal advice prior to any resale of the Certificates.
Representations of Purchasers
By purchasing Certificates in Canada and accepting a purchase
confirmation, a purchaser is representing to Southwest and the
dealer from whom the purchase confirmation is received that:
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|
|
the purchaser is entitled under applicable provincial securities
laws to purchase the Certificates without the benefit of a
prospectus qualified under those securities laws,
|
|
|
|
where required by law, the purchaser is purchasing as principal
and not as agent, and
|
|
|
|
the purchaser has reviewed the text above under
Resale Restrictions.
|
Rights of ActionOntario Purchasers Only
Under Ontario securities legislation, a purchaser who purchases
a security offered by this Prospectus Supplement during the
period of distribution will have a statutory right of action for
damages, or while still the owner of the securities, for
rescission against Southwest in the event that this Prospectus
Supplement contains a misrepresentation. A purchaser will be
deemed to have relied on the misrepresentation. The right of
action for damages is exercisable not later than the earlier of
180 days from the date the purchaser first had knowledge of
the facts giving rise to the cause of action and three years
from the date on which payment is made for the securities. The
right of action for rescission is exercisable not later than
180 days from the date on which payment is made for the
securities. If a purchaser elects to exercise the right of
action for rescission, the purchaser will have no right of
action for damages against Southwest. In no case will the amount
recoverable in any action exceed the price at which the
securities were offered to the purchaser and if the purchaser is
shown to have purchased the securities with knowledge of the
misrepresentation, Southwest will have no liability. In the case
of an action for damages, Southwest will not be liable for all
or any portion of the damages that are proven to not represent
the depreciation in value of the securities as a result of the
misrepresentation relied upon. These rights are in addition to,
and without derogation from, any other rights or remedies
available at law to an Ontario purchaser. The foregoing is a
summary of the rights available to an Ontario purchaser. Ontario
purchasers should refer to the complete text of the relevant
statutory provisions.
Enforcement of Legal Rights
All of Southwests directors and officers as well as the
experts named herein may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect
service of process within Canada upon Southwest or those
persons. All or a substantial portion of the assets of Southwest
and those persons may be located outside of Canada and, as a
result, it may not be possible to satisfy a judgment against
Southwest or those persons in Canada or to enforce a judgment
obtained in Canadian courts against Southwest or those persons
outside of Canada.
Taxation and Eligibility for Investment
Canadian purchasers of Certificates should consult their own
legal and tax advisors with respect to the tax consequences of
an investment in the Certificates in their particular
circumstances and about the eligibility of the Certificates for
investment by the purchaser under relevant Canadian legislation.
S-66
The validity of the Certificates is being passed upon for
Southwest by Vinson & Elkins L.L.P., Houston, Texas,
and for the Underwriters by Milbank, Tweed, Hadley &
McCloy LLP, New York, New York. Vinson & Elkins L.L.P.
and Milbank, Tweed, Hadley & McCloy LLP will rely on
the opinion of Morris James LLP, Wilmington, Delaware, counsel
for Wilmington Trust Company, as Trustee, as to matters of
Delaware law relating to the Pass Through Trust Agreements.
Members of Vinson & Elkins L.L.P. involved in this
Offering beneficially own approximately 25,000 shares of
our common stock.
The consolidated financial statements of Southwest Airlines Co.
appearing in Southwest Airlines Co.s Annual Report on
Form 10-K
for the year ended December 31, 2006, as amended, and
Southwest Airlines Co.s managements assessment of
the effectiveness of internal control over financial reporting
as of December 31, 2006 included therein, have been audited
by Ernst & Young LLP, independent registered public
accounting firm, as set forth in its reports thereon, included
therein, and incorporated herein by reference. Such financial
statements and managements assessment are incorporated
herein by reference in reliance upon such reports given on the
authority of Ernst & Young LLP as experts in
accounting and auditing.
The references to AISI, BACK and BK, and to their respective
appraisal reports, dated as of June 25, 2007, July 16,
2007 and July 16, 2007, respectively, are included herein
in reliance upon the authority of each such firm as an expert
with respect to the matters contained in its appraisal report.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by Southwest with the Commission
are incorporated by reference in this Prospectus Supplement:
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|
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Filing
|
|
Date Filed
|
|
Current Report on
Form 8-K
|
|
January 19, 2007
|
Annual Report on
Form 10-K
for the year ended December 31, 2006
|
|
February 1, 2007
|
Amendment to No. 1 to Annual
Report on
Form 10-K
for the year ended December 31, 2006
|
|
February 27, 2007
|
Current Report on
Form 8-K
|
|
March 19, 2007
|
Quarterly Report on
Form 10-Q
for quarter ended March 31, 2007
|
|
April 23, 2007
|
Amendment to No. 2 to Annual
Report on
Form 10-K
for the year ended December 31, 2006
|
|
April 24, 2007
|
Current Report on
Form 8-K
|
|
May 17, 2007
|
Quarterly Report on
Form 10-Q
for quarter ended June 30, 2007
|
|
July 20, 2007
|
Current Report on
Form 8-K
|
|
July 20, 2007
|
Reference is made to the information under Where You Can
Find More Information in the accompanying Prospectus. All
documents filed under the Securities Exchange Act of 1934 with
the Commission prior to January 1, 2007 and incorporated by
reference in the Prospectus have been superseded by the above
listed documents and shall not be deemed to constitute a part of
the Prospectus or this Prospectus Supplement.
S-67
APPENDIX IINDEX
OF TERMS
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|
|
|
|
Page
|
|
60-Day
Period
|
|
S-25
|
Actual Disposition Event
|
|
S-43
|
Additional Certificates
|
|
S-56
|
Additional Equipment Notes
|
|
S-56
|
Additional Trust
|
|
S-56
|
Administration Expenses
|
|
S-41
|
Aircraft
|
|
S-45
|
AISI
|
|
S-2,45
|
Applicable Fraction
|
|
S-42
|
Appraisal
|
|
S-40
|
Appraised Current Market Value
|
|
S-41
|
Appraisers
|
|
S-2,45
|
Assumed Aircraft Value
|
|
S-49
|
Average Life Date
|
|
S-48
|
BACK
|
|
S-2,45
|
Bankruptcy Default
|
|
S-50
|
Base Rate
|
|
S-35
|
Basic Agreement
|
|
S-19
|
BK
|
|
S-2,45
|
Boeing
|
|
S-45
|
Business Day
|
|
S-21
|
Cape Town Treaty
|
|
S-52
|
Cash Collateral Account
|
|
S-33
|
Cede
|
|
S-29
|
Certificate Account
|
|
S-21
|
Certificate Buyout Event
|
|
S-25
|
Certificate Owner
|
|
S-29
|
Certificates
|
|
S-19
|
citizen of the United States
|
|
S-26
|
Class A Certificates
|
|
S-19
|
Class A Trust
|
|
S-19
|
Class A Trustee
|
|
S-19
|
Class B Adjusted Interest
|
|
S-42
|
Class B Certificates
|
|
S-19
|
Class B Trust
|
|
S-19
|
Class B Trustee
|
|
S-19
|
Class Exemptions
|
|
S-62
|
clearing agency
|
|
S-29
|
clearing corporation
|
|
S-29
|
Commission
|
|
S-1
|
Controlling Party
|
|
S-7,14,33,37
|
Convention
|
|
S-52
|
Current Distribution Date
|
|
S-42
|
Debt Balance
|
|
S-54
|
Deemed Disposition Event
|
|
S-43
|
default
|
|
S-24
|
Distribution Date
|
|
S-41
|
Downgrade Drawing
|
|
S-33
|
DTC
|
|
S-29
|
DTC Participants
|
|
S-29
|
equipment
|
|
S-51
|
Equipment
|
|
S-51
|
Equipment Note Buyout Event
|
|
S-38
|
Equipment Note Special Payment
|
|
S-41
|
Equipment Notes
|
|
S-47
|
ERISA
|
|
S-62
|
ERISA Plans
|
|
S-62
|
event of default
|
|
S-24
|
Event of Loss
|
|
S-55
|
Excess Liquidity Obligations
|
|
S-38
|
Expected Distributions
|
|
S-42
|
Final Distributions
|
|
S-38
|
Final Drawing
|
|
S-34
|
Final Maturity Date
|
|
S-47
|
Final Payment Date
|
|
S-9
|
Final Termination Notice
|
|
S-36
|
financial institution
|
|
S-60
|
Indenture Default
|
|
S-23
|
Indirect DTC Participants
|
|
S-29
|
Intercreditor Agreement
|
|
S-37
|
Interest Drawing
|
|
S-32
|
Investment Grade
|
|
S-54
|
IRS
|
|
S-57
|
LIBOR
|
|
S-35
|
Liquidity Event of Default
|
|
S-36
|
Liquidity Expenses
|
|
S-42
|
Liquidity Facility
|
|
S-32
|
Liquidity Obligations
|
|
S-42
|
Liquidity Provider
|
|
S-32
|
Liquidity Threshold Rating
|
|
S-33
|
Loan Trustee
|
|
S-47
|
LTVs
|
|
S-3
|
Make-Whole Premium
|
|
S-48
|
Maximum Commitment
|
|
S-32
|
Minimum Sale Price
|
|
S-40
|
Moodys
|
|
S-10
|
Non-Extension Drawing
|
|
S-34
|
Non-Performing Equipment Notes
|
|
S-42
|
non-U.S.
Certificateholder
|
|
S-59
|
Note Holders
|
|
S-50
|
Note Target Price
|
|
S-39
|
Offering
|
|
S-56
|
Participation Agreement
|
|
S-47
|
Pass Through Trust Agreements
|
|
S-19
|
Performing Equipment Note
|
|
S-33
|
Plan Asset Regulation
|
|
S-62
|
Plans
|
|
S-62
|
Pool Balance
|
|
S-21
|
I-1
|
|
|
|
|
Page
|
|
Pool Factor
|
|
S-21
|
Post Default Appraisals
|
|
S-41
|
Preferred B Pool Balance
|
|
S-43
|
PTC Event of Default
|
|
S-25
|
PTCE
|
|
S-62
|
Rating Agencies
|
|
S-10
|
Refinancing Certificates
|
|
S-56
|
Refinancing Equipment Notes
|
|
S-56
|
Refinancing Trust
|
|
S-56
|
Regular Distribution Dates
|
|
S-20
|
Related Payment Default
|
|
S-49
|
Replacement Facility
|
|
S-33
|
Required Amount
|
|
S-33
|
Scheduled Payments
|
|
S-20
|
Section 1110
|
|
S-51
|
Series A Equipment Notes
|
|
S-47
|
Series B Equipment Notes
|
|
S-47
|
Shortfall Amount
|
|
S-59
|
Southwest Bankruptcy Event
|
|
S-21
|
Special Distribution Date
|
|
S-20
|
Special Payment
|
|
S-20
|
Special Payments Account
|
|
S-21
|
Special Termination Drawing
|
|
S-34
|
Special Termination Notice
|
|
S-36
|
Standard & Poors
|
|
S-10
|
Stated Interest Rate
|
|
S-32
|
Subordinated Certificateholders
|
|
S-59
|
Subordinated Certificates
|
|
S-59
|
Subordinated Trust
|
|
S-59
|
Subordination Agent
|
|
S-37
|
SWAPA
|
|
S-11
|
Tax Counsel
|
|
S-57
|
Termination Notice
|
|
S-36
|
Transportation Code
|
|
S-26
|
Treasury Yield
|
|
S-48
|
Triggering Event
|
|
S-20
|
Trust Indenture Act
|
|
S-27
|
Trust Property
|
|
S-19
|
Trust Supplement
|
|
S-19
|
Trustee
|
|
S-19
|
Trusts
|
|
S-19
|
U.S. Certificateholders
|
|
S-57
|
U.S. Persons
|
|
S-57
|
Underwriter Exemption
|
|
S-63
|
Underwriters
|
|
S-64
|
I-2
APPENDIX
II APPRAISAL LETTERS
16 July 2007
Scott Topping
Vice President and Treasurer
Southwest Airlines Co. 2702
Love Field Drive
Dallas, TX 75235
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Subject:
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Sight Unseen Base Value Opinion Adjusted for Condition as of 25 June 2007 |
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16 Aircraft Fleet |
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AISI File number: A7S041BVO |
Dear Mr. Topping:
Aircraft Information Services, Inc. (AISI) has been requested to offer our opinion of the sight
unseen base value adjusted for condition as of 25 June 2007 for a portfolio of 16 B737-700 Aircraft
as identified and defined in Table I (the Aircraft). All 16 Aircraft are equipped with winglets,
at 154,500 lbs. maximum take off weight (MTOW) and powered by CFM56-7B22 engines.
1. |
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Methodology and Definitions |
The standard terms of reference for commercial aircraft value are base value and current market
value of an average aircraft. Base value is a theoretical value that assumes a hypothetical
balanced market while current market value is the value in the real market; both assume a
hypothetical average aircraft condition. All other values are derived from these values. AISI value
definitions are consistent with the current definitions of the International Society of Transport
Aircraft Trading (ISTAT), those of 01 January 1994. AISI is a member of that organization and
employs an ISTAT Certified and Senior Certified Appraiser.
AISI defines a base value as that of a transaction between an equally willing and informed buyer
and seller, neither under compulsion to buy or sell, for a single unit cash transaction with no
hidden value or liability, with supply and demand of the sale item roughly in balance and with no
event which would cause a short term change in the market. Base values are typically given for
aircraft in new condition, average half-life condition, or adjusted for an aircraft in a
specifically described condition at a specific time. An average aircraft is an operable airworthy
aircraft in average physical condition and with average accumulated flight hours and cycles, with
clear title and standard unrestricted certificate of airworthiness, and registered in an authority
which does not represent a penalty to aircraft value or liquidity, with no damage history and with
inventory configuration and level of modification which is normal for its intended use and age.
Headquarters: 26072 Merit Circle, Suite 123, Laguna Hills, CA 92653
TEL: 949-582-8888 FAX: 949-582-8887 E-MAIL: mail@AISI.aero
16 July 2007
AISI File No. A7S041BVO
Page - 2 -
Note that a stored aircraft is not an average aircraft. AISI assumes average condition unless
otherwise specified in this report. AISI also assumes that airframe, engine and component
maintenance and essential records are sufficient to permit normal commercial operation under a
strict airworthiness authority.
Half-life condition assumes that every component or maintenance service which has a prescribed
interval that determines its service life, overhaul interval or interval between maintenance
services, is at a condition which is one-half of the total interval.
An adjusted appraisal reflects an adjustment from half life condition for the actual condition,
utilization, life remaining or time remaining of an airframe, engine or component.
It should be noted that AISI and ISTAT value definitions apply to a transaction involving a single
aircraft, and that transactions involving more than one aircraft are often executed at considerable
and highly variable discounts to a single aircraft price, for a variety of reasons relating to an
individual buyer or seller.
AISI defines a current market value, which is synonymous with the older term fair market value
as that value which reflects the real market conditions including short term events, whether at,
above or below the base value conditions. Assumptions of a single unit sale and definitions of
aircraft condition, buyer/seller qualifications and type of transaction remain unchanged from that
of base value. Current market value takes into consideration the status of the economy in which the
aircraft is used, the status of supply and demand for the particular aircraft type, the value of
recent transactions and the opinions of informed buyers and sellers. Note that for a current market
value to exist, the seller may not be under duress. Current market value assumes that there is no
short term time constraint to buy or sell.
AISI defines a distressed market value as that value which reflects the real market condition
including short term events, when the market for the subject aircraft is so depressed that the
seller is under duress. Distressed market value assumes that there is a time constraint to sell
within a period of less than 1 year. All other assumptions remain unchanged from that of current
market value.
AISI encourages the use of base values to consider historical trends, to establish a consistent
baseline for long term value comparisons and future value considerations, or to consider how actual
market values vary from theoretical base values. Base values are less volatile than current market
values and tend to diminish regularly with time. Base values are normally inappropriate to
determine near term values. AISI encourages the use of
current market values to consider the probable near term value of an aircraft when the seller is
not under duress. AISI encourages the use of distressed market values to consider the probable near
term value of an aircraft when the seller is under duress.
16 July 2007
AISI File No. A7S041BVO
Page - 3 -
No physical inspection of the Aircraft or their essential records was made by AISI for the purposes
of this report, nor has any attempt been made to verify information provided to us, which is
assumed to be correct and applicable to the Aircraft.
If more than one aircraft is contained in this report than it should be noted that the values given
are not directly additive, that is, the total of the given values is not the value of the fleet but
rather the sum of the values of the individual aircraft if sold individually over time so as not to
exceed demand.
It is our considered opinion that the sight unseen base values adjusted for condition as of 25 June
2007 of the Aircraft are as follows in Table I subject to the assumptions, definitions, and
disclaimers herein.
TABLE I
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Adjusted |
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Base Value |
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Serial |
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Registration |
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Date |
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MTOW |
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as of 25 Jun 2007 |
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No. |
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Aircraft Type |
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Number |
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Number |
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of Mfg. |
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Engine Type |
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(Lbs) |
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Million US Dollars |
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1 |
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B737-700 |
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35554 |
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N259WN |
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Nov-06 |
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CFM56-7B22 |
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154,500 |
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$ |
40.80 |
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2 |
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B737-700 |
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32518 |
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N260WN |
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Nov-06 |
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CFM56-7B22 |
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154,500 |
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$ |
40.89 |
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3 |
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B737-700 |
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32517 |
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N261WN |
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Dec-06 |
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CFM56-7B22 |
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154,500 |
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$ |
40.96 |
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4 |
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B737-700 |
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32519 |
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N262WN |
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Dec-06 |
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CFM56-7B22 |
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154,500 |
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$ |
41.01 |
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5 |
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B737-700 |
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32520 |
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N263WN |
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Jan-07 |
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CFM56-7B22 |
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154,500 |
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$ |
43.75 |
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6 |
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B737-700 |
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32521 |
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N264LV |
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Jan-07 |
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CFM56-7B22 |
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154,500 |
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$ |
43.77 |
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7 |
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B737-700 |
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32522 |
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N265WN |
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Feb-07 |
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CFM56-7B22 |
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154,500 |
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$ |
43.81 |
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8 |
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B737-700 |
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32525 |
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N267WN |
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Feb-07 |
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CFM56-7B22 |
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154,500 |
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$ |
43.91 |
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9 |
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B737-700 |
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32524 |
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N268WN |
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Mar-07 |
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CFM56-7B22 |
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154,500 |
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$ |
43.93 |
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10 |
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B737-700 |
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32526 |
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N269WN |
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Mar-07 |
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CFM56-7B22 |
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154,500 |
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$ |
43.95 |
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11 |
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B737-700 |
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32527 |
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N272WN |
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Mar-07 |
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CFM56-7B22 |
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154,500 |
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$ |
44.05 |
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12 |
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B737-700 |
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32529 |
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N274WN |
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Apr-07 |
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CFM56-7B22 |
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154,500 |
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$ |
44.17 |
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13 |
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B737-700 |
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36153 |
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N275WN |
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May-07 |
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CFM56-7B22 |
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154,500 |
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$ |
44.19 |
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14 |
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B737-700 |
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32530 |
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N276WN |
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May-07 |
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CFM56-7B22 |
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154,500 |
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$ |
44.24 |
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15 |
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B737-700 |
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32531 |
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N277WN |
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May-07 |
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CFM56-7B22 |
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154,500 |
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$ |
44.31 |
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16 |
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B737-700 |
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36441 |
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N278WN |
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May-07 |
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CFM56-7B22 |
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154,500 |
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$ |
44.32 |
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Total |
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$ |
692.06 |
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Note: All the B737-700 Aircraft listed above are equipped with Winglets
16 July 2007
AISI File No. A7S041BVO
Page - 4 -
Unless otherwise agreed by Aircraft Information Services, Inc. (AISI) in writing, this report shall
be for the sole use of the client/addressee. AISI consents to the inclusion of this appraisals
report dated 16 July 2007 with values as of 25 June 2007 in the Prospectus and the reference to
AISIs name in the Prospectus under the caption Experts.
This report is offered as a fair and unbiased assessment of the subject aircraft. AISI has no past,
present, or anticipated future interest in any of the subject aircraft. The conclusions and
opinions expressed in this report are based on published information, information provided by
others, reasonable interpretations and calculations thereof and are given in good faith. AISI
certifies that this report has been independently prepared and it reflects AISIs conclusions and
opinions which are judgments that reflect conditions and values current at the time of this report.
The values and conditions reported upon are subject to any subsequent change. AISI shall not be
liable to any party for damages arising out of reliance or alleged reliance on this report, or for
any partys action or failure to act as a result of reliance or alleged reliance on this report.
Sincerely,
AIRCRAFT INFORMATION SERVICES, INC.
John D. McNicol
President
July 16, 2007
Scott Topping
Vice President and Treasurer
Southwest Airlines Co.
2702 Love Field Drive
Dallas, TX 75235
Dear Mr. Topping:
CBM/BACK LLC, dba BACK Aviation Solutions, BACK, is pleased to provide its opinion on the
base values as of July 16, 2007 of Sixteen (16) Boeing 737-700 aircraft (collectively, the
Aircraft). A list of the Aircraft, along with their registration, serial number, delivery dates,
and engine types is provided as Attachment 1 of this document.
Set forth below is a summary of the methodology, considerations and assumptions utilized in
this appraisal.
Base Value
Base value (BV) is the appraisers opinion of the underlying economic value of an aircraft in
an open, unrestricted, stable market environment with a reasonable balance of supply and demand,
and assumes full consideration of its highest and best use. An aircrafts base value is founded
in the historical trend of values and in the projection of future value trends and presumes an
arms length, cash transaction between willing, able and knowledge parties acting prudently, with
an absence of duress and with a reasonable period of time available for marketing.
Appraisal Methodology
The method employed by BACK to appraise the base value of aircraft and associated equipment
addresses the factors that influence the market value of an aircraft, such as its age, condition,
configuration, the population of similar aircraft, similar aircraft on the market, operating costs,
cost to acquire a new aircraft, and the state of demand for transportation services.
To achieve this objective, cross-sectional data concerning the values of aircraft in each of
several general categories is collected and analyzed. Cross-sectional data is then compared with
reported market values at a specified point in time. Such data reflects the effect of deterioration
in aircraft performance due to usage and exposure to the elements, as well as the effect of
obsolescence due to the evolutionary development and implementation of new designs and materials.
The product of the analysis identifies the relationship between the value of each aircraft and
its characteristics, such as age, model designation, service configuration and engine type. Once
the relationship is identified, one can then postulate the effects of the difference between the
economic circumstances at the time when the cross-sectional data were collected and the current
situation. Therefore, if one can determine the current value of an aircraft in one category, it is
possible to
estimate the base values of all aircraft in that category.
The manufacturer and size of the aircraft usually determine the specific category to which it
is assigned. Segregating the world airplane fleet in this manner accommodates the potential effects
of different size and different design philosophies.
The variability of the data used by BACK to determine the base values implies that the actual
value realized will fall within a range of values. Therefore, if a contemplated value falls within
the specified confidence range, BACK cannot reject the hypothesis that it is a reasonable
representation of the market situation.
Limiting Conditions and Assumptions
In order to conduct this valuation, BACK is primarily relying on information supplied by Southwest
Airlines Co. (the Client) and from data within BACKs own database. In determining the base value
of the Aircraft, the following assumptions have been researched and determined:
1. BACK has not inspected these Aircraft or their maintenance records; accordingly, BACK cannot
attest to their specific location or condition.
2. The
Aircraft will be certified, maintained and operated under United States Federal Aviation Regulation (FAR) Part 121.
3. All mandatory inspections and Airworthiness Directives have been complied with.
4. The Aircraft have no damage history.
5. The Aircraft are in good condition.
6. BACK considers the economic useful life of these aircraft to be at least 32 years.
7. Each Aircraft has a MTOW of 154,500lbs and is equipped with blended winglets.
Based upon the above methodology, considerations and assumptions, it is BACKs opinion that
the base values of each Aircraft are as listed in Attachment 1.
STATEMENT OF INDEPENDENCE & CONSENT
This appraisal report represents the opinion of BACK and is intended to be advisory in nature.
Therefore, BACK assumes no responsibility or legal liability for actions taken or not taken by the
Client or any other party with regard to the Aircraft. By accepting this report, the Client agrees
that BACK shall bear no responsibility or legal liability regarding this report. Further, this
report is prepared for the exclusive use of the Client and shall not be provided to other parties
without BACKs express consent.
BACK hereby states that this valuation report has been independently prepared and fairly
represents the Aircraft and BACKs opinion of their values. BACK further states that it has no
present or contemplated future interest or association with the
Aircraft.
BACK hereby consents to the inclusion of our report dated July 16, 2007 in the Prospectus and
to the reference to our firms names in the Prospectus under the caption Experts.
Signed,
Gueric Dechavanne
Director, Valuation Services
Attachment 1
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Southwest Airlines Co. |
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LUV 2007-1 EETC Aircraft Summary |
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BV |
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No. |
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Tail No. |
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AC Type |
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MSN |
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Engine Model |
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Delivery Date |
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As of July 16, |
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2007 |
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1 |
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N259WN |
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737-700 |
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35554 |
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CFM56-7B22 |
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1-Nov-06 |
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$ |
38.58 |
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2 |
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N260WN |
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737-700 |
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32518 |
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CFM56-7B22 |
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22-Nov-06 |
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$ |
38.61 |
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3 |
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N261WN |
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737-700 |
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32517 |
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CFM56-7B22 |
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14-Dec-06 |
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$ |
38.90 |
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4 |
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N262WN |
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737-700 |
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32519 |
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CFM56-7B22 |
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21-Dec-06 |
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$ |
38.92 |
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5 |
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N263WN |
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737-700 |
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32520 |
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CFM56-7B22 |
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17-Jan-07 |
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$ |
39.22 |
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6 |
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N264LV |
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737-700 |
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32521 |
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CFM56-7B22 |
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24-Jan-07 |
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$ |
39.23 |
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7 |
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N265WN |
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737-700 |
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32522 |
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CFM56-7B22 |
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6-Feb-07 |
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$ |
39.51 |
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8 |
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N267WN |
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737-700 |
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32525 |
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CFM56-7B22 |
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26-Feb-07 |
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$ |
39.60 |
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9 |
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N268WN |
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737-700 |
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32524 |
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CFM56-7B22 |
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5-Mar-07 |
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$ |
39.81 |
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10 |
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N269WN |
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737-700 |
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32526 |
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CFM56-7B22 |
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13-Mar-07 |
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$ |
39.82 |
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11 |
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N272WN |
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737-700 |
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32527 |
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CFM56-7B22 |
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29-Mar-07 |
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$ |
39.85 |
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12 |
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N274WN |
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737-700 |
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32529 |
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CFM56-7B22 |
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23-Apr-07 |
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$ |
40.15 |
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13 |
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N275WN |
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737-700 |
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36153 |
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CFM56-7B22 |
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3-May-07 |
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$ |
40.42 |
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14 |
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N276WN |
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737-700 |
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32530 |
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CFM56-7B22 |
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14-May-07 |
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$ |
40.45 |
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15 |
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N277WN |
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737-700 |
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32531 |
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CFM56-7B22 |
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24-May-07 |
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$ |
40.46 |
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16 |
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N278WN |
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737-700 |
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36441 |
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CFM56-7B22 |
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31-May-07 |
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$ |
40.47 |
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1295 Northern Boulevard
Manhasset, New York 11030
(516) 365-6272 · Fax (516) 365-6287
July 16, 2007
Mr. Scott Topping
Vice President & Treasurer
Southwest Airlines Co.
2702 Love Field Drive
Dallas, TX 75235
Dear Mr. Topping:
In response to your request, BK Associates, Inc. is pleased to provide this opinion on the base
values (BV) of 16 Boeing 737-7H4 aircraft, each equipped with CFM International CFM56-7B22 engines
(Aircraft). The Aircraft, which comprise the LUV 2007-1 EETC are operated in passenger
configuration by Southwest Airlines at a maximum takeoff weight of 154,500 pounds. The Aircraft,
which are fitted with Aviation Partners Boeing winglets, are further identified in the attached
Figure 1 by serial number, registration and delivery date.
CONCLUSIONS
Based upon our knowledge of the B737-700 aircraft and the CFM56 series engines; our knowledge of
the capabilities and uses to which they have been put in various parts of the world; our knowledge
of the marketing of aircraft; and our knowledge of aircraft generally; it is our opinion that the
BV of each of the Aircraft in millions of U.S. dollars is as shown in Figure 1.
DEFINITIONS
According to the International Society of Transport Aircraft Tradings (ISTAT) definition of Base
Value, to which BK Associates subscribes, the base value is the Appraisers opinion of the
underlying economic value of an aircraft in an open, unrestricted, stable market environment with a
reasonable balance of supply and demand, and assumes full consideration of its highest and best
use. An aircrafts base value is founded in the historical trend of values and in the projection
of future value trends and presumes an arms length, cash transaction between willing, able and
knowledgeable parties, acting prudently, with an absence of duress and with a reasonable period of
time available for marketing. The base value normally refers to a transaction involving a single
aircraft. When multiple aircraft are acquired in the same transaction, the trading price of each
unit may be discounted.
July 16, 2007
Page 2
MARKET DISCUSSION & METHODOLOGY
For a newly delivered aircraft one can argue that, almost by definition, the base value is
approximately equal to the actual selling price. Without the existence of white tails or finished
aircraft for which there is no buyer, the very existence of a buyer and seller at the agreed price
suggests the market is in balance and the purchase price is the base value.
We do not know the purchase price of the Aircraft but we do know the list price is in the range
between $57 and $67 million depending on the configuration and options. We also know that nobody
pays list price and the discount is normally at least 15 percent. Discounts of 25 to 35 percent are
often applied for airlines, such as Southwest, placing large orders. Considering this and the
configuration and specifications of the Aircraft, we conclude its likely new price is approximately
$38,200,000.
It is the convention for aircraft appraisals for comparison purposes to determine a value for an
aircraft that is at half-time between major maintenance events. Adjustments are then made to
account for the actual time remaining. In the case of a new aircraft, which has not accumulated any
flight time, this adjustment is irrelevant and the adjusted base value is just equal to the new
price. For those Aircraft that were delivered in the First Quarter of 2007 or the Fourth Quarter of
2006, we have deducted an allowance based on Southwest Airlines utilization for the cost of the
hours used against the allowance for heavy maintenance visits for the airframe and engines.
ASSUMPTIONS & DISCLAIMER
It should be understood that BK Associates has neither inspected the Aircraft nor the maintenance
records, but has relied upon the information provided by you and in the BK Associates database. The
assumptions have been made that at the time of delivery all Airworthiness Directives have been
complied with. Further, we have assumed unless otherwise stated, that the Aircraft is in typical
configuration for the type. Deviations from these assumptions can change significantly our opinion
regarding the value.
BK Associates, Inc. has no present or contemplated future interest in the Aircraft, nor any
interest that would preclude our making a fair and unbiased estimate. This appraisal represents
the independent opinion of BK Associates, Inc. and reflects our best judgment based on the
information available to us at the time of preparation and the time and budget constraints imposed
by the client. It is not given as a recommendation, or as an inducement, for any financial
transaction and further, BK Associates, Inc. assumes no responsibility or legal liability for any
action taken or not taken by the addressee, or any other party, with regard to the appraised
equipment. By accepting this appraisal, the
July 16, 2007
Page 3
addressee agrees that BK Associates, Inc. shall bear no such responsibility or legal liability.
This appraisal is prepared for the use of the addressee and shall not be provided to other parties
without the express consent of the addressee.
BK Associates, Inc. hereby consents to the inclusion of our report dated July 16, 2007 in the
Prospectus and to the reference to our firms name in the Prospectus under the caption Experts.
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Sincerely, |
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BK ASSOCIATES, INC. |
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John F. Keitz |
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President |
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ISTAT Senior Certified Appraiser |
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And Appraiser Fellow |
JFK/kf
Attachment
Figure 1
LUV 2007-1 EETC AIRCRAFT VALUES
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Serial |
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Acft. |
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Engine |
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Delivery |
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$mils. |
No. |
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Reg. # |
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Number |
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Type |
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Model |
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Date |
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BV |
1 |
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N259WN |
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35554 |
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B737-7H4BW |
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CFM56-7B22 |
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11/1/2006 |
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37.55 |
2 |
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N260WN |
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32518 |
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B737-7H4BW |
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CFM56-7B22 |
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11/22/2006 |
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37.55 |
3 |
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N261WN |
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32517 |
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B737-7H4BW |
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CFM56-7B22 |
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12/14/2006 |
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37.55 |
4 |
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N262WN |
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32519 |
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B737-7H4BW |
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CFM56-7B22 |
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12/21/2006 |
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37.55 |
5 |
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N263WN |
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32520 |
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B737-7H4BW |
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CFM56-7B22 |
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1/17/2007 |
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37.90 |
6 |
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N264LV |
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32521 |
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B737-7H4BW |
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CFM56-7B22 |
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1/24/2007 |
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37.90 |
7 |
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N265WN |
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32522 |
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B737-7H4BW |
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CFM56-7B22 |
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2/6/2007 |
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37.90 |
8 |
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N267WN |
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32525 |
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B737-7H4BW |
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CFM56-7B22 |
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2/26/2007 |
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37.90 |
9 |
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N268WN |
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32524 |
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B737-7H4BW |
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CFM56-7B22 |
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3/5/2007 |
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38.20 |
10 |
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N269WN |
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32526 |
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B737-7H4BW |
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CFM56-7B22 |
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3/13/2007 |
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38.20 |
11 |
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N272WN |
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32527 |
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B737-7H4BW |
|
CFM56-7B22 |
|
3/29/2007 |
|
38.20 |
12 |
|
N274WN |
|
32529 |
|
B737-7H4BW |
|
CFM56-7B22 |
|
4/23/2007 |
|
38.20 |
13 |
|
N275WN |
|
36153 |
|
B737-7H4BW |
|
CFM56-7B22 |
|
5/3/2007 |
|
38.20 |
14 |
|
N276WN |
|
32530 |
|
B737-7H4BW |
|
CFM56-7B22 |
|
5/14/2007 |
|
38.20 |
15 |
|
N277WN |
|
32531 |
|
B737-7H4BW |
|
CFM56-7B22 |
|
5/24/2007 |
|
38.20 |
16 |
|
N278WN |
|
36441 |
|
B737-7H4BW |
|
CFM56-7B22 |
|
5/31/2007 |
|
38.20 |
APPENDIX IIILOAN
TO AIRCRAFT VALUE RATIO TABLES
The following tables set forth loan to Aircraft value ratios for
the Equipment Notes issued in respect of each of the Aircraft as
of the Issuance Date and each Regular Distribution Date
thereafter. The LTV ratio was obtained by dividing (i) the
outstanding balance (assuming no prepayments and no payment
default) of such Equipment Notes determined immediately after
giving effect to the payments scheduled to be made on each such
Regular Distribution Date by (ii) the assumed value of the
Aircraft securing such Equipment Notes, subject to the
Depreciation Assumption. The Depreciation Assumption
contemplates that the value of each Aircraft depreciates by
approximately 3% of the initial appraised base value per year
for the first 15 years after delivery of such Aircraft by
the manufacturer and by approximately 4% each year after that.
Other rates or methods of depreciation may result in materially
different loan to Aircraft value ratios, and no assurance can be
given (i) that the depreciation rates and method assumed
for the purposes of the tables are the ones most likely to occur
or (ii) as to the actual future value of any Aircraft.
Thus, the tables should not be considered a forecast or
prediction of expected or likely loan to Aircraft value ratios,
but simply a mathematical calculation based on one set of
assumptions.
Boeing
737-700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N259WN
|
|
|
|
|
|
|
Outstanding Value
|
|
|
Loan to Value Ratio
|
|
|
|
Assumed
|
|
|
Series A
|
|
|
Series B
|
|
|
Series A
|
|
|
Series B
|
|
|
|
Aircraft
|
|
|
Equipment
|
|
|
Equipment
|
|
|
Equipment
|
|
|
Equipment
|
|
Date
|
|
Value
|
|
|
Notes
|
|
|
Notes
|
|
|
Notes
|
|
|
Notes
|
|
|
At Issuance
|
|
$
|
38,580,000.00
|
|
|
$
|
25,077,000.00
|
|
|
$
|
5,348,867.51
|
|
|
|
65.0
|
%
|
|
|
78.9
|
%
|
February 1, 2008
|
|
|
37,992,487.31
|
|
|
|
24,642,597.22
|
|
|
|
5,256,210.38
|
|
|
|
64.9
|
|
|
|
78.7
|
|
August 1, 2008
|
|
|
37,404,974.62
|
|
|
|
24,242,987.54
|
|
|
|
5,170,974.53
|
|
|
|
64.8
|
|
|
|
78.6
|
|
February 1, 2009
|
|
|
36,817,461.93
|
|
|
|
23,843,377.85
|
|
|
|
5,085,738.69
|
|
|
|
64.8
|
|
|
|
78.6
|
|
August 1, 2009
|
|
|
36,229,949.24
|
|
|
|
23,443,768.17
|
|
|
|
5,000,502.84
|
|
|
|
64.7
|
|
|
|
78.5
|
|
February 1, 2010
|
|
|
35,642,436.55
|
|
|
|
22,687,734.12
|
|
|
|
4,915,267.00
|
|
|
|
63.7
|
|
|
|
77.4
|
|
August 1, 2010
|
|
|
35,054,923.86
|
|
|
|
22,191,633.34
|
|
|
|
4,830,031.16
|
|
|
|
63.3
|
|
|
|
77.1
|
|
February 1, 2011
|
|
|
34,467,411.17
|
|
|
|
21,699,626.21
|
|
|
|
4,744,795.31
|
|
|
|
63.0
|
|
|
|
76.7
|
|
August 1, 2011
|
|
|
33,879,898.48
|
|
|
|
21,211,712.73
|
|
|
|
4,659,559.47
|
|
|
|
62.6
|
|
|
|
76.4
|
|
February 1, 2012
|
|
|
33,292,385.79
|
|
|
|
20,727,892.89
|
|
|
|
4,574,323.62
|
|
|
|
62.3
|
|
|
|
76.0
|
|
August 1, 2012
|
|
|
32,704,873.10
|
|
|
|
20,248,166.70
|
|
|
|
4,489,087.78
|
|
|
|
61.9
|
|
|
|
75.6
|
|
February 1, 2013
|
|
|
32,117,360.41
|
|
|
|
19,772,534.16
|
|
|
|
4,403,851.94
|
|
|
|
61.6
|
|
|
|
75.3
|
|
August 1, 2013
|
|
|
31,529,847.72
|
|
|
|
19,300,995.26
|
|
|
|
3,983,847.49
|
|
|
|
61.2
|
|
|
|
73.9
|
|
February 1, 2014
|
|
|
30,942,335.03
|
|
|
|
18,852,522.18
|
|
|
|
3,905,218.92
|
|
|
|
60.9
|
|
|
|
73.5
|
|
August 1, 2014
|
|
|
30,354,822.34
|
|
|
|
18,407,422.29
|
|
|
|
3,826,590.35
|
|
|
|
60.6
|
|
|
|
73.2
|
|
February 1, 2015
|
|
|
29,767,309.64
|
|
|
|
17,965,695.58
|
|
|
|
3,747,961.78
|
|
|
|
60.4
|
|
|
|
72.9
|
|
August 1, 2015
|
|
|
29,179,796.95
|
|
|
|
17,527,342.06
|
|
|
|
3,669,333.21
|
|
|
|
60.1
|
|
|
|
72.6
|
|
February 1, 2016
|
|
|
28,592,284.26
|
|
|
|
17,092,361.72
|
|
|
|
3,590,704.64
|
|
|
|
59.8
|
|
|
|
72.3
|
|
August 1, 2016
|
|
|
28,004,771.57
|
|
|
|
16,660,754.56
|
|
|
|
3,512,076.07
|
|
|
|
59.5
|
|
|
|
72.0
|
|
February 1, 2017
|
|
|
27,417,258.88
|
|
|
|
15,968,194.82
|
|
|
|
3,377,538.22
|
|
|
|
58.2
|
|
|
|
70.6
|
|
August 1, 2017
|
|
|
26,829,746.19
|
|
|
|
15,057,787.99
|
|
|
|
3,195,675.57
|
|
|
|
56.1
|
|
|
|
68.0
|
|
February 1, 2018
|
|
|
26,242,233.50
|
|
|
|
13,989,137.24
|
|
|
|
2,978,718.56
|
|
|
|
53.3
|
|
|
|
64.7
|
|
August 1, 2018
|
|
|
25,654,720.81
|
|
|
|
12,791,704.20
|
|
|
|
2,732,636.74
|
|
|
|
49.9
|
|
|
|
60.5
|
|
February 1, 2019
|
|
|
25,067,208.12
|
|
|
|
11,483,743.25
|
|
|
|
2,448,618.77
|
|
|
|
45.8
|
|
|
|
55.6
|
|
August 1, 2019
|
|
|
24,479,695.43
|
|
|
|
10,077,919.41
|
|
|
|
2,144,644.56
|
|
|
|
41.2
|
|
|
|
49.9
|
|
February 1, 2020
|
|
|
23,892,182.74
|
|
|
|
8,583,648.32
|
|
|
|
1,822,899.66
|
|
|
|
35.9
|
|
|
|
43.6
|
|
August 1, 2020
|
|
|
23,304,670.05
|
|
|
|
7,008,265.63
|
|
|
|
1,485,129.38
|
|
|
|
30.1
|
|
|
|
36.4
|
|
February 1, 2021
|
|
|
22,717,157.36
|
|
|
|
5,357,683.75
|
|
|
|
1,122,196.09
|
|
|
|
23.6
|
|
|
|
28.5
|
|
August 1, 2021
|
|
|
22,129,644.67
|
|
|
|
3,636,792.35
|
|
|
|
752,349.83
|
|
|
|
16.4
|
|
|
|
19.8
|
|
February 1, 2022
|
|
|
21,542,131.98
|
|
|
|
1,849,717.89
|
|
|
|
172,291.65
|
|
|
|
8.6
|
|
|
|
9.4
|
|
August 1, 2022
|
|
|
20,758,781.73
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
N/
|
A
|
|
|
N/
|
A
|
III-1
Boeing
737-700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N260WN
|
|
|
|
|
|
|
Outstanding Value
|
|
|
Loan to Value Ratio
|
|
|
|
Assumed
|
|
|
Series A
|
|
|
Series B
|
|
|
Series A
|
|
|
Series B
|
|
|
|
Aircraft
|
|
|
Equipment
|
|
|
Equipment
|
|
|
Equipment
|
|
|
Equipment
|
|
Date
|
|
Value
|
|
|
Notes
|
|
|
Notes
|
|
|
Notes
|
|
|
Notes
|
|
|
At Issuance
|
|
$
|
38,610,000.00
|
|
|
$
|
25,096,500.00
|
|
|
$
|
5,353,026.81
|
|
|
|
65.0
|
%
|
|
|
78.9
|
%
|
February 1, 2008
|
|
|
38,022,030.46
|
|
|
|
24,661,759.43
|
|
|
|
5,260,297.63
|
|
|
|
64.9
|
|
|
|
78.7
|
|
August 1, 2008
|
|
|
37,434,060.91
|
|
|
|
24,261,839.00
|
|
|
|
5,174,995.51
|
|
|
|
64.8
|
|
|
|
78.6
|
|
February 1, 2009
|
|
|
36,846,091.37
|
|
|
|
23,861,918.58
|
|
|
|
5,089,693.38
|
|
|
|
64.8
|
|
|
|
78.6
|
|
August 1, 2009
|
|
|
36,258,121.83
|
|
|
|
23,461,998.16
|
|
|
|
5,004,391.26
|
|
|
|
64.7
|
|
|
|
78.5
|
|
February 1, 2010
|
|
|
35,670,152.28
|
|
|
|
22,705,376.21
|
|
|
|
4,919,089.14
|
|
|
|
63.7
|
|
|
|
77.4
|
|
August 1, 2010
|
|
|
35,082,182.74
|
|
|
|
22,208,889.66
|
|
|
|
4,833,787.01
|
|
|
|
63.3
|
|
|
|
77.1
|
|
February 1, 2011
|
|
|
34,494,213.20
|
|
|
|
21,716,499.95
|
|
|
|
4,748,484.89
|
|
|
|
63.0
|
|
|
|
76.7
|
|
August 1, 2011
|
|
|
33,906,243.65
|
|
|
|
21,228,207.06
|
|
|
|
4,663,182.76
|
|
|
|
62.6
|
|
|
|
76.4
|
|
February 1, 2012
|
|
|
33,318,274.11
|
|
|
|
20,744,011.00
|
|
|
|
4,577,880.64
|
|
|
|
62.3
|
|
|
|
76.0
|
|
August 1, 2012
|
|
|
32,730,304.57
|
|
|
|
20,263,911.77
|
|
|
|
4,492,578.52
|
|
|
|
61.9
|
|
|
|
75.6
|
|
February 1, 2013
|
|
|
32,142,335.03
|
|
|
|
19,787,909.38
|
|
|
|
4,407,276.39
|
|
|
|
61.6
|
|
|
|
75.3
|
|
August 1, 2013
|
|
|
31,554,365.48
|
|
|
|
19,316,003.81
|
|
|
|
3,986,945.35
|
|
|
|
61.2
|
|
|
|
73.9
|
|
February 1, 2014
|
|
|
30,966,395.94
|
|
|
|
18,867,182.00
|
|
|
|
3,908,255.64
|
|
|
|
60.9
|
|
|
|
73.5
|
|
August 1, 2014
|
|
|
30,378,426.40
|
|
|
|
18,421,735.99
|
|
|
|
3,829,565.93
|
|
|
|
60.6
|
|
|
|
73.2
|
|
February 1, 2015
|
|
|
29,790,456.85
|
|
|
|
17,979,665.79
|
|
|
|
3,750,876.21
|
|
|
|
60.4
|
|
|
|
72.9
|
|
August 1, 2015
|
|
|
29,202,487.31
|
|
|
|
17,540,971.41
|
|
|
|
3,672,186.50
|
|
|
|
60.1
|
|
|
|
72.6
|
|
February 1, 2016
|
|
|
28,614,517.77
|
|
|
|
17,105,652.83
|
|
|
|
3,593,496.79
|
|
|
|
59.8
|
|
|
|
72.3
|
|
August 1, 2016
|
|
|
28,026,548.22
|
|
|
|
16,673,710.05
|
|
|
|
3,514,807.08
|
|
|
|
59.5
|
|
|
|
72.0
|
|
February 1, 2017
|
|
|
27,438,578.68
|
|
|
|
15,980,611.77
|
|
|
|
3,380,164.61
|
|
|
|
58.2
|
|
|
|
70.6
|
|
August 1, 2017
|
|
|
26,850,609.14
|
|
|
|
15,069,497.01
|
|
|
|
3,198,160.55
|
|
|
|
56.1
|
|
|
|
68.0
|
|
February 1, 2018
|
|
|
26,262,639.59
|
|
|
|
14,000,015.26
|
|
|
|
2,981,034.82
|
|
|
|
53.3
|
|
|
|
64.7
|
|
August 1, 2018
|
|
|
25,674,670.05
|
|
|
|
12,801,651.10
|
|
|
|
2,734,761.65
|
|
|
|
49.9
|
|
|
|
60.5
|
|
February 1, 2019
|
|
|
25,086,700.51
|
|
|
|
11,492,673.07
|
|
|
|
2,450,522.83
|
|
|
|
45.8
|
|
|
|
55.6
|
|
August 1, 2019
|
|
|
24,498,730.96
|
|
|
|
10,085,756.05
|
|
|
|
2,146,312.24
|
|
|
|
41.2
|
|
|
|
49.9
|
|
February 1, 2020
|
|
|
23,910,761.42
|
|
|
|
8,590,323.01
|
|
|
|
1,824,317.15
|
|
|
|
35.9
|
|
|
|
43.6
|
|
August 1, 2020
|
|
|
23,322,791.88
|
|
|
|
7,013,715.29
|
|
|
|
1,486,284.22
|
|
|
|
30.1
|
|
|
|
36.4
|
|
February 1, 2021
|
|
|
22,734,822.34
|
|
|
|
5,361,849.91
|
|
|
|
1,123,068.71
|
|
|
|
23.6
|
|
|
|
28.5
|
|
August 1, 2021
|
|
|
22,146,852.79
|
|
|
|
3,639,620.34
|
|
|
|
752,934.86
|
|
|
|
16.4
|
|
|
|
19.8
|
|
February 1, 2022
|
|
|
21,558,883.25
|
|
|
|
1,851,156.24
|
|
|
|
172,425.62
|
|
|
|
8.6
|
|
|
|
9.4
|
|
August 1, 2022
|
|
|
20,774,923.86
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
N/
|
A
|
|
|
N/
|
A
|
Boeing
737-700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N261WN
|
|
|
|
|
|
|
Outstanding Value
|
|
|
Loan to Value Ratio
|
|
|
|
Assumed
|
|
|
Series A
|
|
|
Series B
|
|
|
Series A
|
|
|
Series B
|
|
|
|
Aircraft
|
|
|
Equipment
|
|
|
Equipment
|
|
|
Equipment
|
|
|
Equipment
|
|
Date
|
|
Value
|
|
|
Notes
|
|
|
Notes
|
|
|
Notes
|
|
|
Notes
|
|
|
At Issuance
|
|
$
|
38,900,000.00
|
|
|
$
|
25,285,000.00
|
|
|
$
|
5,393,233.44
|
|
|
|
65.0
|
%
|
|
|
78.9
|
%
|
February 1, 2008
|
|
|
38,307,614.21
|
|
|
|
24,846,994.09
|
|
|
|
5,299,807.77
|
|
|
|
64.9
|
|
|
|
78.7
|
|
August 1, 2008
|
|
|
37,715,228.43
|
|
|
|
24,444,069.86
|
|
|
|
5,213,864.94
|
|
|
|
64.8
|
|
|
|
78.6
|
|
February 1, 2009
|
|
|
37,122,842.64
|
|
|
|
24,041,145.63
|
|
|
|
5,127,922.11
|
|
|
|
64.8
|
|
|
|
78.6
|
|
August 1, 2009
|
|
|
36,530,456.85
|
|
|
|
23,638,221.40
|
|
|
|
5,041,979.28
|
|
|
|
64.7
|
|
|
|
78.5
|
|
February 1, 2010
|
|
|
35,938,071.07
|
|
|
|
22,875,916.47
|
|
|
|
4,956,036.45
|
|
|
|
63.7
|
|
|
|
77.4
|
|
August 1, 2010
|
|
|
35,345,685.28
|
|
|
|
22,375,700.80
|
|
|
|
4,870,093.62
|
|
|
|
63.3
|
|
|
|
77.1
|
|
February 1, 2011
|
|
|
34,753,299.49
|
|
|
|
21,879,612.74
|
|
|
|
4,784,150.79
|
|
|
|
63.0
|
|
|
|
76.7
|
|
August 1, 2011
|
|
|
34,160,913.71
|
|
|
|
21,387,652.28
|
|
|
|
4,698,207.97
|
|
|
|
62.6
|
|
|
|
76.4
|
|
February 1, 2012
|
|
|
33,568,527.92
|
|
|
|
20,899,819.42
|
|
|
|
4,612,265.14
|
|
|
|
62.3
|
|
|
|
76.0
|
|
August 1, 2012
|
|
|
32,976,142.13
|
|
|
|
20,416,114.17
|
|
|
|
4,526,322.31
|
|
|
|
61.9
|
|
|
|
75.6
|
|
February 1, 2013
|
|
|
32,383,756.35
|
|
|
|
19,936,536.52
|
|
|
|
4,440,379.48
|
|
|
|
61.6
|
|
|
|
75.3
|
|
August 1, 2013
|
|
|
31,791,370.56
|
|
|
|
19,461,086.46
|
|
|
|
4,016,891.32
|
|
|
|
61.2
|
|
|
|
73.9
|
|
February 1, 2014
|
|
|
31,198,984.77
|
|
|
|
19,008,893.54
|
|
|
|
3,937,610.57
|
|
|
|
60.9
|
|
|
|
73.5
|
|
August 1, 2014
|
|
|
30,606,598.98
|
|
|
|
18,560,101.79
|
|
|
|
3,858,329.82
|
|
|
|
60.6
|
|
|
|
73.2
|
|
February 1, 2015
|
|
|
30,014,213.20
|
|
|
|
18,114,711.20
|
|
|
|
3,779,049.07
|
|
|
|
60.4
|
|
|
|
72.9
|
|
August 1, 2015
|
|
|
29,421,827.41
|
|
|
|
17,672,721.77
|
|
|
|
3,699,768.32
|
|
|
|
60.1
|
|
|
|
72.6
|
|
February 1, 2016
|
|
|
28,829,441.62
|
|
|
|
17,234,133.51
|
|
|
|
3,620,487.57
|
|
|
|
59.8
|
|
|
|
72.3
|
|
August 1, 2016
|
|
|
28,237,055.84
|
|
|
|
16,798,946.42
|
|
|
|
3,541,206.83
|
|
|
|
59.5
|
|
|
|
72.0
|
|
February 1, 2017
|
|
|
27,644,670.05
|
|
|
|
16,100,642.27
|
|
|
|
3,405,553.05
|
|
|
|
58.2
|
|
|
|
70.6
|
|
August 1, 2017
|
|
|
27,052,284.26
|
|
|
|
15,182,684.11
|
|
|
|
3,222,181.95
|
|
|
|
56.1
|
|
|
|
68.0
|
|
February 1, 2018
|
|
|
26,459,898.48
|
|
|
|
14,105,169.48
|
|
|
|
3,003,425.40
|
|
|
|
53.3
|
|
|
|
64.7
|
|
August 1, 2018
|
|
|
25,867,512.69
|
|
|
|
12,897,804.39
|
|
|
|
2,755,302.47
|
|
|
|
49.9
|
|
|
|
60.5
|
|
February 1, 2019
|
|
|
25,275,126.90
|
|
|
|
11,578,994.62
|
|
|
|
2,468,928.73
|
|
|
|
45.8
|
|
|
|
55.6
|
|
August 1, 2019
|
|
|
24,682,741.12
|
|
|
|
10,161,510.24
|
|
|
|
2,162,433.21
|
|
|
|
41.2
|
|
|
|
49.9
|
|
February 1, 2020
|
|
|
24,090,355.33
|
|
|
|
8,654,844.99
|
|
|
|
1,838,019.61
|
|
|
|
35.9
|
|
|
|
43.6
|
|
August 1, 2020
|
|
|
23,497,969.54
|
|
|
|
7,066,395.36
|
|
|
|
1,497,447.72
|
|
|
|
30.1
|
|
|
|
36.4
|
|
February 1, 2021
|
|
|
22,905,583.76
|
|
|
|
5,402,122.81
|
|
|
|
1,131,504.09
|
|
|
|
23.6
|
|
|
|
28.5
|
|
August 1, 2021
|
|
|
22,313,197.97
|
|
|
|
3,666,957.56
|
|
|
|
758,590.16
|
|
|
|
16.4
|
|
|
|
19.8
|
|
February 1, 2022
|
|
|
21,720,812.18
|
|
|
|
1,865,060.28
|
|
|
|
173,720.71
|
|
|
|
8.6
|
|
|
|
9.4
|
|
August 1, 2022
|
|
|
20,930,964.47
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
N/
|
A
|
|
|
N/
|
A
|
III-2
Boeing
737-700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N262WN
|
|
|
|
|
|
|
Outstanding Value
|
|
|
Loan to Value Ratio
|
|
|
|
Assumed
|
|
|
Series A
|
|
|
Series B
|
|
|
Series A
|
|
|
Series B
|
|
|
|
Aircraft
|
|
|
Equipment
|
|
|
Equipment
|
|
|
Equipment
|
|
|
Equipment
|
|
Date
|
|
Value
|
|
|
Notes
|
|
|
Notes
|
|
|
Notes
|
|
|
Notes
|
|
|
At Issuance
|
|
$
|
38,920,000.00
|
|
|
$
|
25,298,000.00
|
|
|
$
|
5,396,006.31
|
|
|
|
65.0
|
%
|
|
|
78.9
|
%
|
February 1, 2008
|
|
|
38,327,309.64
|
|
|
|
24,859,768.89
|
|
|
|
5,302,532.60
|
|
|
|
64.9
|
|
|
|
78.7
|
|
August 1, 2008
|
|
|
37,734,619.29
|
|
|
|
24,456,637.51
|
|
|
|
5,216,545.59
|
|
|
|
64.8
|
|
|
|
78.6
|
|
February 1, 2009
|
|
|
37,141,928.93
|
|
|
|
24,053,506.12
|
|
|
|
5,130,558.57
|
|
|
|
64.8
|
|
|
|
78.6
|
|
August 1, 2009
|
|
|
36,549,238.58
|
|
|
|
23,650,374.73
|
|
|
|
5,044,571.56
|
|
|
|
64.7
|
|
|
|
78.5
|
|
February 1, 2010
|
|
|
35,956,548.22
|
|
|
|
22,887,677.86
|
|
|
|
4,958,584.54
|
|
|
|
63.7
|
|
|
|
77.4
|
|
August 1, 2010
|
|
|
35,363,857.87
|
|
|
|
22,387,205.02
|
|
|
|
4,872,597.53
|
|
|
|
63.3
|
|
|
|
77.1
|
|
February 1, 2011
|
|
|
34,771,167.51
|
|
|
|
21,890,861.90
|
|
|
|
4,786,610.51
|
|
|
|
63.0
|
|
|
|
76.7
|
|
August 1, 2011
|
|
|
34,178,477.16
|
|
|
|
21,398,648.51
|
|
|
|
4,700,623.50
|
|
|
|
62.6
|
|
|
|
76.4
|
|
February 1, 2012
|
|
|
33,585,786.80
|
|
|
|
20,910,564.83
|
|
|
|
4,614,636.48
|
|
|
|
62.3
|
|
|
|
76.0
|
|
August 1, 2012
|
|
|
32,993,096.45
|
|
|
|
20,426,610.89
|
|
|
|
4,528,649.47
|
|
|
|
61.9
|
|
|
|
75.6
|
|
February 1, 2013
|
|
|
32,400,406.09
|
|
|
|
19,946,786.66
|
|
|
|
4,442,662.45
|
|
|
|
61.6
|
|
|
|
75.3
|
|
August 1, 2013
|
|
|
31,807,715.74
|
|
|
|
19,471,092.16
|
|
|
|
4,018,956.56
|
|
|
|
61.2
|
|
|
|
73.9
|
|
February 1, 2014
|
|
|
31,215,025.38
|
|
|
|
19,018,666.75
|
|
|
|
3,939,635.05
|
|
|
|
60.9
|
|
|
|
73.5
|
|
August 1, 2014
|
|
|
30,622,335.03
|
|
|
|
18,569,644.26
|
|
|
|
3,860,313.54
|
|
|
|
60.6
|
|
|
|
73.2
|
|
February 1, 2015
|
|
|
30,029,644.67
|
|
|
|
18,124,024.68
|
|
|
|
3,780,992.03
|
|
|
|
60.4
|
|
|
|
72.9
|
|
August 1, 2015
|
|
|
29,436,954.31
|
|
|
|
17,681,808.00
|
|
|
|
3,701,670.52
|
|
|
|
60.1
|
|
|
|
72.6
|
|
February 1, 2016
|
|
|
28,844,263.96
|
|
|
|
17,242,994.25
|
|
|
|
3,622,349.01
|
|
|
|
59.8
|
|
|
|
72.3
|
|
August 1, 2016
|
|
|
28,251,573.60
|
|
|
|
16,807,583.40
|
|
|
|
3,543,027.50
|
|
|
|
59.5
|
|
|
|
72.0
|
|
February 1, 2017
|
|
|
27,658,883.25
|
|
|
|
16,108,920.23
|
|
|
|
3,407,303.98
|
|
|
|
58.2
|
|
|
|
70.6
|
|
August 1, 2017
|
|
|
27,066,192.89
|
|
|
|
15,190,490.12
|
|
|
|
3,223,838.60
|
|
|
|
56.1
|
|
|
|
68.0
|
|
February 1, 2018
|
|
|
26,473,502.54
|
|
|
|
14,112,421.50
|
|
|
|
3,004,969.57
|
|
|
|
53.3
|
|
|
|
64.7
|
|
August 1, 2018
|
|
|
25,880,812.18
|
|
|
|
12,904,435.65
|
|
|
|
2,756,719.08
|
|
|
|
49.9
|
|
|
|
60.5
|
|
February 1, 2019
|
|
|
25,288,121.83
|
|
|
|
11,584,947.83
|
|
|
|
2,470,198.10
|
|
|
|
45.8
|
|
|
|
55.6
|
|
August 1, 2019
|
|
|
24,695,431.47
|
|
|
|
10,166,734.67
|
|
|
|
2,163,545.00
|
|
|
|
41.2
|
|
|
|
49.9
|
|
February 1, 2020
|
|
|
24,102,741.12
|
|
|
|
8,659,294.78
|
|
|
|
1,838,964.61
|
|
|
|
35.9
|
|
|
|
43.6
|
|
August 1, 2020
|
|
|
23,510,050.76
|
|
|
|
7,070,028.47
|
|
|
|
1,498,217.61
|
|
|
|
30.1
|
|
|
|
36.4
|
|
February 1, 2021
|
|
|
22,917,360.41
|
|
|
|
5,404,900.25
|
|
|
|
1,132,085.84
|
|
|
|
23.6
|
|
|
|
28.5
|
|
August 1, 2021
|
|
|
22,324,670.05
|
|
|
|
3,668,842.88
|
|
|
|
758,980.18
|
|
|
|
16.4
|
|
|
|
19.8
|
|
February 1, 2022
|
|
|
21,731,979.70
|
|
|
|
1,866,019.18
|
|
|
|
173,810.03
|
|
|
|
8.6
|
|
|
|
9.4
|
|
August 1, 2022
|
|
|
20,941,725.89
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
N/
|
A
|
|
|
N/
|
A
|
Boeing
737-700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N263WN
|
|
|
|
|
|
|
Outstanding Value
|
|
|
Loan to Value Ratio
|
|
|
|
Assumed
|
|
|
Series A
|
|
|
Series B
|
|
|
Series A
|
|
|
Series B
|
|
|
|
Aircraft
|
|
|
Equipment
|
|
|
Equipment
|
|
|
Equipment
|
|
|
Equipment
|
|
Date
|
|
Value
|
|
|
Notes
|
|
|
Notes
|
|
|
Notes
|
|
|
Notes
|
|
|
At Issuance
|
|
$
|
39,220,000.00
|
|
|
$
|
25,493,000.00
|
|
|
$
|
5,437,599.37
|
|
|
|
65.0
|
%
|
|
|
78.9
|
%
|
February 1, 2008
|
|
|
38,622,741.12
|
|
|
|
25,051,390.96
|
|
|
|
5,343,405.16
|
|
|
|
64.9
|
|
|
|
78.7
|
|
August 1, 2008
|
|
|
38,025,482.23
|
|
|
|
24,645,152.18
|
|
|
|
5,256,755.34
|
|
|
|
64.8
|
|
|
|
78.6
|
|
February 1, 2009
|
|
|
37,428,223.35
|
|
|
|
24,238,913.41
|
|
|
|
5,170,105.53
|
|
|
|
64.8
|
|
|
|
78.6
|
|
August 1, 2009
|
|
|
36,830,964.47
|
|
|
|
23,832,674.64
|
|
|
|
5,083,455.72
|
|
|
|
64.7
|
|
|
|
78.5
|
|
February 1, 2010
|
|
|
36,233,705.58
|
|
|
|
23,064,098.81
|
|
|
|
4,996,805.90
|
|
|
|
63.7
|
|
|
|
77.4
|
|
August 1, 2010
|
|
|
35,636,446.70
|
|
|
|
22,559,768.26
|
|
|
|
4,910,156.09
|
|
|
|
63.3
|
|
|
|
77.1
|
|
February 1, 2011
|
|
|
35,039,187.82
|
|
|
|
22,059,599.27
|
|
|
|
4,823,506.28
|
|
|
|
63.0
|
|
|
|
76.7
|
|
August 1, 2011
|
|
|
34,441,928.93
|
|
|
|
21,563,591.83
|
|
|
|
4,736,856.46
|
|
|
|
62.6
|
|
|
|
76.4
|
|
February 1, 2012
|
|
|
33,844,670.05
|
|
|
|
21,071,745.96
|
|
|
|
4,650,206.65
|
|
|
|
62.3
|
|
|
|
76.0
|
|
August 1, 2012
|
|
|
33,247,411.17
|
|
|
|
20,584,061.64
|
|
|
|
4,563,556.84
|
|
|
|
61.9
|
|
|
|
75.6
|
|
February 1, 2013
|
|
|
32,650,152.28
|
|
|
|
20,100,538.87
|
|
|
|
4,476,907.02
|
|
|
|
61.6
|
|
|
|
75.3
|
|
August 1, 2013
|
|
|
32,052,893.40
|
|
|
|
19,621,177.66
|
|
|
|
4,049,935.16
|
|
|
|
61.2
|
|
|
|
73.9
|
|
February 1, 2014
|
|
|
31,455,634.52
|
|
|
|
19,165,264.90
|
|
|
|
3,970,002.23
|
|
|
|
60.9
|
|
|
|
73.5
|
|
August 1, 2014
|
|
|
30,858,375.63
|
|
|
|
18,712,781.29
|
|
|
|
3,890,069.30
|
|
|
|
60.6
|
|
|
|
73.2
|
|
February 1, 2015
|
|
|
30,261,116.75
|
|
|
|
18,263,726.82
|
|
|
|
3,810,136.37
|
|
|
|
60.4
|
|
|
|
72.9
|
|
August 1, 2015
|
|
|
29,663,857.87
|
|
|
|
17,818,101.49
|
|
|
|
3,730,203.44
|
|
|
|
60.1
|
|
|
|
72.6
|
|
February 1, 2016
|
|
|
29,066,598.98
|
|
|
|
17,375,905.30
|
|
|
|
3,650,270.51
|
|
|
|
59.8
|
|
|
|
72.3
|
|
August 1, 2016
|
|
|
28,469,340.10
|
|
|
|
16,937,138.26
|
|
|
|
3,570,337.58
|
|
|
|
59.5
|
|
|
|
72.0
|
|
February 1, 2017
|
|
|
27,872,081.22
|
|
|
|
16,233,089.71
|
|
|
|
3,433,567.88
|
|
|
|
58.2
|
|
|
|
70.6
|
|
August 1, 2017
|
|
|
27,274,822.34
|
|
|
|
15,307,580.23
|
|
|
|
3,248,688.33
|
|
|
|
56.1
|
|
|
|
68.0
|
|
February 1, 2018
|
|
|
26,677,563.45
|
|
|
|
14,221,201.72
|
|
|
|
3,028,132.24
|
|
|
|
53.3
|
|
|
|
64.7
|
|
August 1, 2018
|
|
|
26,080,304.57
|
|
|
|
13,003,904.58
|
|
|
|
2,777,968.20
|
|
|
|
49.9
|
|
|
|
60.5
|
|
February 1, 2019
|
|
|
25,483,045.69
|
|
|
|
11,674,245.99
|
|
|
|
2,489,238.68
|
|
|
|
45.8
|
|
|
|
55.6
|
|
August 1, 2019
|
|
|
24,885,786.80
|
|
|
|
10,245,101.07
|
|
|
|
2,180,221.86
|
|
|
|
41.2
|
|
|
|
49.9
|
|
February 1, 2020
|
|
|
24,288,527.92
|
|
|
|
8,726,041.66
|
|
|
|
1,853,139.57
|
|
|
|
35.9
|
|
|
|
43.6
|
|
August 1, 2020
|
|
|
23,691,269.04
|
|
|
|
7,124,525.09
|
|
|
|
1,509,766.05
|
|
|
|
30.1
|
|
|
|
36.4
|
|
February 1, 2021
|
|
|
23,094,010.15
|
|
|
|
5,446,561.86
|
|
|
|
1,140,812.09
|
|
|
|
23.6
|
|
|
|
28.5
|
|
August 1, 2021
|
|
|
22,496,751.27
|
|
|
|
3,697,122.76
|
|
|
|
764,830.49
|
|
|
|
16.4
|
|
|
|
19.8
|
|
February 1, 2022
|
|
|
21,899,492.39
|
|
|
|
1,880,402.68
|
|
|
|
175,149.78
|
|
|
|
8.6
|
|
|
|
9.4
|
|
August 1, 2022
|
|
|
21,103,147.21
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
N/
|
A
|
|
|
N/
|
A
|
III-3
Boeing
737-700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N264LV
|
|
|
|
|
|
|
Outstanding Value
|
|
|
Loan to Value Ratio
|
|
|
|
Assumed
|
|
|
Series A
|
|
|
Series B
|
|
|
Series A
|
|
|
Series B
|
|
|
|
Aircraft
|
|
|
Equipment
|
|
|
Equipment
|
|
|
Equipment
|
|
|
Equipment
|
|
Date
|
|
Value
|
|
|
Notes
|
|
|
Notes
|
|
|
Notes
|
|
|
Notes
|
|
|
At Issuance
|
|
$
|
39,230,000.00
|
|
|
$
|
25,499,500.00
|
|
|
$
|
5,438,985.80
|
|
|
|
65.0
|
%
|
|
|
78.9
|
%
|
February 1, 2008
|
|
|
38,632,588.83
|
|
|
|
25,057,778.36
|
|
|
|
5,344,767.57
|
|
|
|
64.9
|
|
|
|
78.7
|
|
|