American and United new bonds diverge as investors weigh collateral, future cash needs

American Airlines and United Airlines new secured bond deals have diverged in trading as investors express preference for United’s collateral package while coronavirus cases spike back up in regions across the US. At the same time, the lower-credit quality American still faces a hole of up to USD 2.5bn in its expected cash needs through 2021, according to six sources following the company.

United’s new USD 3.8bn 6.5% senior secured bonds due 2027, backed by its Mileage Plus loyalty program worth roughly USD 20bn, are quoted around par this morning after pricing yesterday at 98.75 to yield 7%, two of the sources said.

American’s USD 2.5bn 11.75% senior secured notes due 2025, which priced on Wednesday (24 June) at 99, traded as low as the 94 context yesterday before ticking up slightly to 95.375 to yield 13.025% today, according to MarketAxess. American’s bonds are backed by slots, gates and routes, which the company values at USD 7.45bn. 

Unlike United, American is saving its domestic AAdvantage Program assets to use as collateral for a CARES Act loan structured as a USD 4.75bn Libor+ 350bps TL due 2025. The loyalty program was appraised by a third-party at USD 19.5bn-USD 31.5bn, according to company documents. 

Even with the new USD 2.5bn bonds, USD 1.9bn in new equity and converts and USD 4.5bn CARES Act loan, American will still likely need roughly USD 2.5bn in capital to get to the end of 2021, estimated two of the sources. That would address its massive cash burn of up to USD 10bn in 2020 and USD 2bn in 2021, along with more than USD 5bn in maturities through the end of next year. 

By 30 June, American expects to have USD 11bn in liquidity, assuming the USD 4.75bn secured CARES Act loan is funded in June, the filings state. 

In a 27 April reportDebtwire affiliate Xtract Research estimated the company had USD 24bn in debt capacity, before drawing on its 364-day loan or the CARES Act funding from the government. 

American’s liquidity situation became more dire in April, with the company drawing USD 2.7bn on the revolver, offset by receiving half of the allotted assistance or USD 2.9bn under the federal Payroll Support Program. 

More recently, the company has reduced its costs significantly and announced that it is planning to fly 55% of its domestic schedule and nearly 20% of its international schedule in July 2020 compared to the same period last year.

Because of the increased flying schedule, American is projecting a deceleration in cash burn to USD 40m per day in June, compared to USD 100m per day in April. The company is aiming to reduce that cash burn figure to zero by the end of 2020, according to the 12 June operational update

New issues volumes rise as travel stays low 

While high yield bonds and equity have been taken for a spin by the regularly changing sentiment toward pandemic recovery, new issuance has consistently grown since April – culminating in a frenzy so far in June, sources said. 

At least 64 high yield issuers have priced bonds and loans since 1 June, according to Debtwire data. Since last Monday (15 June) alone, more than 55 issuers have either launched or priced deals. 

On the airline front, JetBlue pushed through a loan offering on 15 June, while Delta Air Lines also came back to the market for an unsecured notes offering on 10 June.  

While Delta was able to tap the market in April for a secured notes offering, the company returned to the market earlier in June for USD 1.25bn 7.375% senior unsecured notes due 2026. 

Both airlines’ new debt has traded off over the last few days, in line with American’s new bonds, due to the travel implications of a spike in coronavirus cases across the country. 

American is specifically exposed to a second wave of the pandemic, especially in Texas and California, with 30% of its May bookings coming from the former and 10% from the latter, one of the sources said.

Thursday marked the worst day of new coronavirus infections in the US, with Florida, Texas, Oklahoma and South Carolina reporting their highest single day-totals on Wednesday. In response to the increases, New York, New Jersey and Connecticut called for a 14-day quarantine for visitors traveling from states experiencing spikes.

JetBlue’s USD 750m L+525bps first lien TLB due 2024 traded today in the 98/98.9 context, compared to trades at 99.833/100.333 earlier in the week and 99.65/100.125 context last week (19 June), according to Markit.

Delta’s USD 1.25bn 7.375% senior unsecured notes due 2026 traded today at 97 to yield 8.052%, compared to trades at 101 to yield 7.149% last week and a 99.986 issuance price, according to MarketAxess. 

2020 Debtwire

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