United Airlines could resuscitate secured bond deal with better collateral as sector valuations soar

This month’s market rally has thrown the window open for more issuers that need to raise capital to weather the COVID-19 crisis and address near-term cash needs. Chief among high yield names that investors expect to take advantage of the conditions soon is United Airlines, which launched a bond deal in May but pulled it from syndication after pricing expectations drifted into double digits, said nine sources following the company. 

The company needs cash, as it faces massive cash burn this year – up to USD 8bn, estimated one of the sources – and USD 3.05bn in maturities by the end of next year. As of 29 April, the company had USD 9.6bn in liquidity. 

Yields across the airline sector have tightened dramatically since United first attempted to raise a USD 2.25bn secured bond deal on 6 May. The BB/Baa3 rated Delta Air Lines’ secured bonds have tightened by about 150bps, while the yield on BB-/Ba1 rated United’s own unsecured bonds has halved over the same period. 

Meanwhile, equities have shot up by roughly 20% or more across the major airlines in the last few days.

JPMorgan held discussions with investors the week after the deal was pulled to solicit feedback on what it would take to resurrect the deal, according to one of the sources. At the time, sources said the deal’s collateral package needed to be revised along with widened talk and a downsize to boot. 

The recent market momentum combined with United’s ability to offer stronger collateral could make a deal more palatable to investors this time around, five of the sources said. 

When the issuer attempted to raise the dual-tranche USD 2.25bn secured bond, whispers from lead bank JPMorgan reached up to the 11% area, with buysiders pushing for 12%, according to four of the sources. The initial collateral package included a portion of the company’s aircraft fleet, which investors classified generally as old in comparison to many other airlines. 

Source: company documents 

Now, sources estimate United could raise a secured deal in the 10% area if it provides revamped collateral, such as including slots or routes similar to the recent Delta Air Lines deal. The higher-rated Delta has a similar average fleet age to United, so its willingness to provide routes and slots helped it price its upsized USD 3.5bn 7% first lien bond due 2025 on 29 April. 

United also has a valuable loyalty program that it could use to secure debt, but it may seek to save that to back a potential secured loan from the government later this year, sources said. 

Recently appointed CEO Scott Kirby reiterated at the Bernstein Strategic Decisions Conference on 28 May that the company has about USD 10bn worth of collateral to secure new debt, on top of the loyalty program. 

Sector takes flight 

Last week’s rally brought the aerospace sector up as a whole on the expectation that the market is seeing some recovery and expecting travel demand to rebound slightly over the summer, four of the sources said. 

Even before the reaction to the jobs report, American Airlines announced that it plans to fly 55% of its domestic schedule in July, compared to flying 20% of its schedule from a year before in May, according to media reports. United plans to fly 30% of its July 2019 schedule, another report states. 

Delta’s USD 3.5bn 7% first lien notes due 2025 traded today at 107.625 to yield 5.212%, up from trades at 101.25 to yield 6.7% when United launched its deal on 6 May, according to MarketAxess. The equity rose another 8.14% today to USD 36.94 per share for a market cap of USD 23.58bn after rising 10.3% on Friday. 

American’s USD 500m 3.75% senior unsecured notes due 2025 last traded today at 68.5 to yield 12.844%, compared to trades at 40 to yield 26.5% when United launched its deal on 6 May, according to MarketAxess. The equity rose 9.25% today to USD 20.31 per share for a market cap of USD 8.59bn after rising 18.9% on Friday. 

United’s existing USD 350m 4.875% senior unsecured notes due 2025 last traded on Friday at 85 to yield 8.919%, compared to trades at 62.75 to yield 16.62% in early May, according to MarketAxess. The equity rose another 14.82% today to USD 48.69 per share for a market cap of USD 14.14bn after rising 15.35% on Friday.

However, Moody’s expects air passenger demand to remain low in 2021 with no significant recovery before 2023, according to a 4 June sector analysis report. The report also states that while domestic markets will reopen faster, airlines will still be impacted by the lag in international travel recovery. 

United’s roughly USD 9.6bn in liquidity at the end of April included USD 2bn of revolver capacity and USD 2.5bn received under the Payroll Support Program of the CARES Act. The company is expected to receive an additional USD 2.5bn for payroll by the end of July 2020. 

United still has the option of taking out the USD 4.5bn secured loan from the government to boost liquidity, Kirby said at the Bernstein event in May. However, several sources expect that to be an avenue of last resort given the restrictions that would come along with it, such as limitations on dividends and stock buybacks as well as the government getting warrants for equity. 

Looking ahead, one source projects United will burn up to USD 8bn of cash in 2020, and that if travel demand improves towards the end of the 2020 or early 2021, the company could burn USD 1bn in 2021.

At the Bernstein conference, Kirby reinforced his confidence in the company’s previous cash burn guidance of USD 40m-USD 45m per day for the second quarter, going down to USD 20m per day by the fourth quarter. 

“If there were a time to come, it is now,” one of the sources said. “I’m surprised they haven’t already.”

United and JPMorgan did not respond to requests for comment.

2020 Debtwire

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