Delta Air Lines’ new upsized financing package provides at least another two years of liquidity, positioning the company to weather an extended COVID-19 impact on air travel, according to six sources following the situation. Furthermore, once earnings return to normalized levels, Delta’s capital structure should still be sustainable with low single-digit leverage and ample free cash flow, said two of the sources.
With the proceeds of this week’s secured capital raise, the company will be able to clear out near-term maturities, paying down USD 6bn of its 364-day term loan and revolver borrowings maturing within the next year.
The blowout deal, upsized to USD 9bn from USD 6.5bn, attracted high investor interest due to the loyalty program (SkyMiles) collateral, which helped the bonds achieve an investment grade rating at BBB (Fitch)/Baa1.
Delta has recently been burning around USD 25m in cash per day, and expects that to decline to about USD 20m by the end of the year. Assuming the extreme cash burn of USD 25m per day – which sources don’t expect to persist into next year – the company would burn about USD 18.2bn over the next two years.
Pro forma liquidity, after the new issuance and near-term debt repayments, is about USD 19bn, sources said. Given the strong liquidity position, Delta has opted not to draw on a CARES Act federal loan.
Delta is the latest airline to tap the market with a transaction secured by its loyalty program, following Spirit Airlines earlier this month and United Airlines over the summer.
Barclays led the loan portion of Delta’s deal, and upsized it to USD 3bn from USD 2.5bn, tightening talk to Libor+ 375bps (1% floor) with a 99 OID from talk at L+ 425bps-450bps (1% floor) with a 98.5 OID.
Goldman Sachs, lead on the bonds, upsized the offering to USD 6bn from USD 4bn, split between a five-year and eight-year tranche. Price talk circulated earlier today at 4.75% for the five-year and 5% for the eight-year, tight of earlier whispers in the 4.375% to 4.875% range. The bonds priced this evening, split between USD 2.5bn 4.5% secured bonds due 2025 and USD 3.5bn 4.75% secured bonds due 2028.
For comparison, United’s MileagePlus-backed USD 3.8bn 6.5% senior secured notes due 2027 traded today at 104.625 to yield 5.397%, compared to trades at 104.125 to yield 5.515% on 11 September before the Delta deal was announced, according to MarketAxess. The notes are rated a notch lower than Delta’s on one side, at BBB- (Fitch)/Baa1.
Spirit’s USD 850m 8% senior secured bonds due 2025, backed by its loyalty program and rated BB+ (Fitch)/Ba3, trade wider, last changing hands today at 105.125 to yield 6.587% compared to 103.75 yielding 6.979% on 11 September, according to MarketAxess.
Delta’s own capital structure also gained on the news. Its USD 1.25bn 7.375% senior unsecured notes due 2026 last traded today at 105.5 to yield 6.128%, compared to trades at 104 to yield 6.46% on 10 September, according to MarketAxess.
Flying toward normalized EBITDA
Delta has a better liquidity position compared to peers American Airlines and United. Unlike Delta, American and United may still have to draw on the federal CARES Act loan to bolster enough liquidity to make it through the pandemic, according to four of the sources.
And even after this week’s massive debt issuance, sources expect Delta’s capital structure to be sustainable in a normalized environment, which, conservatively, should arrive by 2022, said three of the sources.
Pro forma the transactions, Delta’s debt load increases to roughly USD 35bn. Using USD 10bn of normalized EBITDAR, the company would be 3.5x levered in a post-pandemic environment.
In a normal operating environment, the company should generate around USD 4.75bn of free cash flow (13.5% of total debt) through USD 10bn of normalized EBITDAR, USD 4bn of capex and USD 1.25bn of pro forma interest expense.
During United’s 2Q20 earnings call, management said that United is leaving the option open to draw on the CARES Act loan, as reported. The company added that if it were to draw on the loan, it would be secured by slots, gates and routes. The potential collateral package is valued at USD 9bn, according to United officials.
For the more-strained names such as American, the CARES Act money still may not be enough to see it through the pandemic, the sources added.
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. During the company’s 2Q20 earnings call, American announced a new USD 1.2bn senior secured notes financing, which is expected to fulfill some of that need.
Representatives for Delta, Goldman and Barclays did not respond to requests for comments.