American Airlines managed to contain its 2Q20 cash burn within guidance, despite posting an overall expected loss in revenue, noted four sources following the company.
The airline also disclosed that it has secured financing to bolster near-term liquidity and has no non-aircraft debt maturities until its USD 750m unsecured bonds mature in June 2022.
“The company is shoring up liquidity and it’s a good thing, because if any of the airlines need to shore up liquidity, it’s this one,” one of the sources said.
Sources estimated American faced a hole of up to USD 2.5bn in its expected cash needs through 2021 after its recent bond deal, as reported. The new financing is expected to fulfill some of that need, three of the sources added.
Management also stated on today’s earnings call that they are working with Boeing to finance 17 aircraft, with delivery expected in late 2020 to early 2021. Sources said that the company is still under pressure to maintain solvency, and the delivery from Boeing will be a critical factor to firm up liquidity through 2021. “All of these financings just kick the can down the road,” one of the sources said.
The company reduced its daily cash burn rate from nearly USD 100m in April to approximately USD 30m in June. On average, American burned USD 55m per day throughout the quarter, compared to its forecast of USD 70m per day.
Moreover, American has received committed financing from Goldman Sachs Merchant Bank for USD 1bn senior secured notes due 2026 and USD 200m senior secured notes due 2026. Both notes will bear an interest rate of 10.75% cash/12% PIK.
The USD 1bn notes will be secured by a first lien on the company’s intellectual property, including the company trademark and website domain and a second lien on the company’s slots at New York LaGuardia and Washington Reagan National airports. Meanwhile, the USD 200m notes will have a first lien on the LGA/DCA slots.
American has the capacity to incur up to USD 4bn of additional pari passu debt and unlimited second lien debt secured by the same collateral as the IP notes. The company expects these notes to be issued in the third quarter.
At quarter end, the company had USD 10.2bn of liquidity, including a net USD 3.6bn raised in the quarter through common stock, convertible bonds and secured bonds. The company raised an additional USD 360m in municipal bonds, which are reserved in the company’s restricted cash balance and short-term investments.
A portion of the net proceeds from the financing activities throughout the quarter paid down the company’s delayed draw term loan credit facility entered into in March 2020, which was set to mature in March 2021.
Pro forma liquidity totals USD 16.2bn through the expected USD 4.75bn CARES Act secured loan to close in the third quarter and the new USD 1.2bn financing.
American has USD 3.77bn of unencumbered assets to issue more debt, excluding the AAdvantage loyalty program assets securing the CARES Act loan.
Management said that using the AAdvantage program to secure transactions is a possibility in the future, similar to the United Airlines MileagePlus deal; however, the company would need to split the asset up into its own entity.
The company expects to end 3Q20 with USD 13bn in liquidity, assuming no other financing activity occurs other than the aforementioned ones.
By the end of the year, the company estimates that it will reduce total operating and capital expenditures by more than USD 15 billion, achieved primarily through cost savings resulting from less flying. During the quarter, American booked USD 1.622bn of operating revenue, down 90% year-over-year.
The newly issued USD 2.5bn 11.75% senior secured notes due 2025 remained relatively unchanged after the report at 91 to yield 14.332% today, compared to trades at 90.75 to yield 14.406% yesterday, according to MarketAxess.
The USD 750m 5% senior unsecured notes due 2022 traded today at 59.67 from trades at 58.5 yesterday. Its USD 277m 4% EETC secured notes due 2025 traded today at 80 to yield 9.093% from trades at 71 to yield 11.706% on 4 June.
Common shares traded up today to USD 12.05 per share and a market cap of USD 6.12bn, up 6% from yesterday’s close.