Pinnacle Airline [PNCL] is selling $110 million in convertible 20-year notes in order to pay off a debt to its former parent, Northwest Airlines [NWAC].

Tapping its cash reserves, Pinnacle with use the cash and the proceeds to pay two debts to Northwest. The note proceeds will be used to repay a $120 million note that has been discounted to $101.6 million. The regional carrier will also repay a $5 million revolving credit agreement held by Northwest.

In a private placement of the $110 million notes to an undisclosed buyer, Pinnacle negotiated an interest rate of 3.25 percent. The buyer will be able to convert every $1,000 in notes into 75.6 shares of Pinnacle stock. The initial conversion price was set at $13.22 a share - a 21.5 percent premium over the Feb. 2 market price of $10.88 a share. The company has also agreed to permit the investor to buy an additional $11 million in notes within 30 days of the Feb. 8 closing.

In anticipation of its late February 2004 earnings announcement, Pinnacle has disclosed that it has been penalized by Northwest for failing to meet certain service standards during the Christmas holiday snow and ice storms. While not disclosing the size of the penalty, Pinnacle said the penalty will reduce its fourth quarter earnings by four to six cents per share. According to a company release, the penalty is a no-excuses assessment. Flights had been hampered by weather in 60 percent of its service area and a computer system failure caused further delays (RAN, Jan. 17).