WestJet primed to cash in on loyalty program as cash burn persists

WestJet Airlines could be the next airline to take advantage of the high yield market for a capital raise to pad liquidity, following the template laid out by Spirit Airlines and Delta Air Lines, according to four sources following the company.

The Calgary-based airline is burning around CAD 5m of cash per day, but its liquidity has held steady over the last quarter thanks in part to the sale of four aircraft, the sources added, citing management comments on yesterday’s 2Q20 earnings call.

As another means of adding liquidity runway, management told lenders of its intention to complete aircraft sale leasebacks, the sources said. But investors are also envisioning WestJet could tap the market for a new secured deal backed by its loyalty programs, similar to deal structures completed recently by Spirit and Delta, they added.

On the call, management said that the company is exploring all options for liquidity. Management added that they will be holding quarterly investor calls going forward, given the distress in the airline industry, lifting some investor concerns around the company’s level of disclosure, two of the sources said.

While some sources were less convinced that a domestic-focused airline such as WestJet would be able to tap the market with its loyalty program, others pointed out that Spirit – which is focused on the US – was able to do so, and those notes are trading well above their issuance price. Additionally, domestic airlines could recover faster than international counterparts as travelers only slowly thaw to flying long distances during COVID-19.

“They need to strike while the iron’s hot. The market is loving these loyalty program deals and given how well Spirit has traded, they could get a decent deal for some much-needed padding in liquidity,” one of the sources said.

Spirit Airlines’ USD 850m 8% senior secured notes due 2025 traded yesterday (23 September) at 104.5 to yield 6.702%, after trading as high as 105.625 to yield 6.392% last week, according to MarketAxess. The notes were upsized during syndication to USD 850m from USD 600m and were issued in early September at 8% and a 98.876 OID for an all-in yield of 8.36%.

WestJet’s USD 1.9bn Libor+ 300bps (1% floor) TLB due 2026 is quoted at 87/89 with a spread to maturity of L+ 631.1bps, compared to quotes at 79.95/82.2 with a spread to maturity of L+788.1 in August after 2Q20 earnings, according to Markit.

Given that WestJet is rated one notch below Spirit by Fitch, sources see a loyalty program deal from WestJet pricing closer to the 9% area, factoring in WestJet’s comparative exposure to international markets.

As of 22 September, the company’s liquidity totaled CAD 1.4bn, in line with the figure the company provided at the end of 2Q, two of the sources and an additional source said. The company has sold four aircrafts so far during the third quarter, which is included in the most recent liquidity figure.

The company also added that cash burn is hovering at CAD 5m per day, two of the sources said, amounting to a roughly nine-month liquidity runway if the cash burn persists and no additional liquidity-enhancing measures are taken. As of 30 June, investors estimated a daily cash burn of roughly CAD 3.5m per day, as reported.

WestJet’s 2Q20 adjusted EBITDA slid to negative CAD 120m as the coronavirus all but halted travel, compared to CAD 200m in 2Q19. Sales declined 93% year-over-year to CAD 84m.

Onex acquired WestJet in late 2019 for CAD 5bn (USD 3.8bn at the time), backed by the USD 1.96bn L+300bps (1% floor) TL, which priced in August. The deal capitalization included CAD 1.649bn of equity and CAD 542m of existing loans from Export Development Canada which were rolled over, according to a Moody’s report at the time.

WestJet declined to comment. Onex did not respond to a request for comment.

2020 Debtwire

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