Uber notes offering catches a lift on ride-hailing recovery prospects, delivery demand surge

The sales pitch backing Uber’s latest bond deal rides on the notion that the worst effects of the pandemic have passed for the company – evidenced by a bookings recovery that’s been propped up by a surge in demand for its meal-delivery service during the lockdown. Throw in the possibility of the company merging with Grubhub, and the market is eating up today’s notes offering to fund working capital, according to eight sources following the situation.

Led by Morgan Stanley, Uber tapped the market with a 2025 unsecured note proposal that was upsized to USD 900m from USD 750m. The B3/CCC+ notes priced at 7.5% and par, in line with talk and tight of whispers in the 7.5%-7.75% range. 

Uber’s existing USD 1.2bn 7.5% senior unsecured notes due 2027 last traded today at 101.35 to yield 7.21%, down slightly from 103 yesterday, according to MarketAxess.

Uber’s ride-hailing segment stands in the crosshairs of the travel sector, affected by fewer consumers leaving their homes and depressed travel demand, five of the sources said. And even after giving effect to the cash jolt provided by the latest deal, the company’s cash burn trend runs deep, dragged down by negative EBITDA that puts even the USD 11bn liquidity position – USD 2.3bn of revolver availability and USD 9.06bn of cash – on less-than-solid ground.

On an LTM basis through 1Q20, adjusted EBITDA shook out to negative USD 2.468bn, compared to negative USD 2.436bn for the same period in 2019. For April, global ride bookings were down 80% year-over-year, which sets 2Q20 earnings on pace for further erosion, the sources said.

As such, the negative indicators set 2020 cash burn expectations in the USD 3bn – USD 5bn range for 2020. Assuming the company has already faced its bottom in bookings, sources estimate the cash burn will lessen to USD 1bn – USD 2bn in 2021. But even as some analysts project quarterly EBITDA could hit positive marks by mid-2021, cash flow still won’t turn positive through early 2023, which could necessitate future taps of the debt market to extend the liquidity runway, the sources said. 

One source added that if the company cuts down on research and development expenses, then the company could save on the cash burn front. In 2019, the company spent nearly USD 1bn for research and development.

In response to the pandemic, Uber implemented USD 1bn in annualized fixed cost savings, including a reduction in marketing spend and deferring real estate capex for planned offices in Chicago, Dallas and Mexico City. The newly-acquired Middle East subsidiary Careem also reduced its workforce by 31%, while Uber laid off 3,700 employees or 14% of its workforce on its customer support and recruiting teams. 

Notably, the company announced last week that it is transferring its JUMP electric bikes unit to competitor Lime. The two companies will merge their apps. The deal is expected to add USD 160m of annual EBITDA savings for Uber.

To comply with social distancing regulations, Uber also suspended its ride-sharing component UberPOOL and added a “leave at door” delivery option for Uber Eats, according to company documents. 

Ride on

While April was volatile overall, the end of the month started showing signs of recovery for the company. On a week-on-week basis, in the last week of April, global bookings grew 9% on a trip basis and 12% on a gross bookings basis. US gross bookings were also up by 12% overall week-on-week including New York City up 14%, San Francisco up 8%, Los Angeles up 10%, and Chicago up 11%.

On the investor call, Uber’s management highlighted that airport rides are 15% of gross bookings and 16% of ride segment EBITDA and they expect that to take time to bounce back as consumers try to become more comfortable with traveling via airplanes. On the positive side, the company also noted that as things return to normal, people will initially avoid mass transit, so they expect consumers to lean on ridesharing heavily.

News reports circulated late yesterday (12 May) that Uber is in talks to take over food delivery giant Grubhub. Reports state that the proposed deal is an all-stock transaction; however, the ride-hailing conglomerate is reportedly not keen on the terms, so negotiations continue.

Management was asked about it on a call today and declined to say anything, one of the sources said.

Sources view the transaction as a positive for the company, but concur that it would be a steep regulatory battle for the company. The transaction would consolidate the meal-delivery space into three competitors, instead of four, including DoorDash and Postmates

The Uber Eats segment saw 89% year-over-year gross bookings growth in April, excluding India, according to the company’s 1Q20 earnings call.

Grubhub’s USD 500m 5.5% senior unsecured notes due 2027 last traded today at 96 to yield 6.2%, down slightly from heightened levels of 98 yesterday on the news of the possible acquisition of Grubhub, according to MarketAxess.

Morgan Stanley declined to comment. Uber did not respond to a request for comment.

2020 Debtwire

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