(Updates to reflect American Airlines changing financing plans in paragraph two, details throughout)
By Aaron Weinman
NEW YORK, June 24 (LPC) – Airlines in the United States are seeking funds to buttress operations after travel plummeted amid the coronavirus pandemic, offering investors favorable yields and valuable protections as they seek to shore up operations.
American Airlines is raising US$2bn in high-yield bonds after increasing the transaction by US$500m on Wednesday, according to a banking source. The company withdrew a proposed US$500m leveraged loan and allocated the amount to the bond sale. The bonds are being offered with price talk of an 11.50%-11.75% coupon at an original issue discount of 99 to yield between 11.76%-12.01%, the source said.
Like the proposed loan, American’s bond will also be secured against routes from the United States to as far as Australia.
United Airlines’ MileagePlus is concurrently in market with a US$2bn loan that is secured against the intellectual property of the loyalty program. The loan is being raised through a special purpose vehicle (SPV) that will receive monthly fees from United and the SPV will pass that cash to the loan’s investors, according to sources familiar with the financing.
“It feels like we are awash with liquidity, and we are now seeing companies from the most challenged sectors doing deals,” said one loan investor. “There is risk out there. And there are folks willing to take that risk on but at a cost.”
Airlines are betting on an uptick in demand for passenger travel in the coming months. American said in a press release that it planned to restore more of its flights in July in response to improving demand as economies slowly reopen. If successful, these transactions will provide crucial liquidity for air carriers that have lost millions of US dollars per day since the coronavirus decimated demand for travel, and were forced to rely on government aid.
“Companies that need to bridge liquidity, even those hit hardest by Covid-19, can get these deals done (now). Our market is open to that,” said Lauren Basmadjian, a senior portfolio manager at the Carlyle Group.
HIGH RISK, HIGH REWARD
American’s transaction is part of a broad financing effort that includes the sale of high-yield bonds, convertible bonds and common shares, according to banking sources. The four-year loan that was part of the deal was offered at 950bp over Libor and a discount between 95-96 cents on the dollar.
United’s US$2bn loan for MileagePlus is being raised alongside a US$3bn bond deal with a similar structure. The seven-year loan is being shopped at 525bp-550bp over Libor and a discount of 97 cents, the bankers said. The debt will be non-callable for the first three years, before being callable at 104, 102 and par thereafter.
“Airlines have always been a tough industry to invest in, and it’s especially difficult now,” said Michael Marzouk, managing director for bank loan strategies at Pacific Asset Management. “But investors are certainly being offered higher yields than what’s out there. In some ways, you’re being compensated.”
A spokesperson for American referred questions to a document filed with the US Securities and Exchange Commission on Monday and a spokesperson for United referred questions to a press release from Tuesday.
Citigroup was leading the loan for American, alongside Goldman Sachs, Bank of America and JP Morgan. Goldman Sachs, Barclays and Morgan Stanley are arranging the loan for United.
Spokespersons for Citi, Bank of America, JP Morgan, Barclays and Morgan Stanley declined to comment. A spokesperson for Goldman Sachs was not immediately available for comment.
Airlines throughout the Americas are scouring for different sources of cash to address liquidity woes. Unlike in the United States, banks and Latin American governments are less willing to provide loans or other cash lifelines for the region’s airlines, which has pushed some carriers into bankruptcy.
Mexican airline Aeromexico said it was “identifying” funding sources to strengthen its cash flow, according to a press release on June 19.
A spokesperson for Aeromexico referred questions to the June 19 press release.
LATAM Airlines, which filed for bankruptcy protection on May 26, obtained up to US$900m in debtor-in-possession (DIP) financing from shareholders including the Cueto and Amaro families and Qatar Airways.
A group of LATAM bondholders are also in talks to provide up to an additional US$1.5bn in DIP funds to the airline, Reuters reported on June 11.
A spokesperson for LATAM did not respond to an email seeking comment.
Colombia’s Avianca filed for bankruptcy protection in May. (Reporting by Aaron Weinman. Editing by Michelle Sierra and Kristen Haunss.)
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