American Airlines trajectory splits between strategic restructuring, loyalty program liquidity bridge

Farhin Lilywala, refer to disclaimer on restrictions of use at the bottom of the page.

Some investors are considering American Airlines as a candidate for a strategic restructuring to help dispense with a nearly USD 40bn debt load and a sky-high cash burn due to COVID-19.

Other investors, still, foresee the airliner first tapping the market as a bridge to an eventual return to normalized air traffic levels post-pandemic, according to eight sources following the company. 

American has been of particular concern even within the troubled airline industry due to its highly-levered balance sheet and dwindling liquidity. And investors see the company as running out of options to prolong its liquidity throughout the duration of the pandemic. 

As of 30 June, the company had USD 10.2bn of liquidity, including a net USD 3.6bn raised in 2Q20 through common stock, convertible bonds and secured bonds. 

The company reduced its daily cash burn rate from nearly USD 100m in April to approximately USD 30m in June – the latter amounting to roughly USD 900m per month or USD 10.8bn annually. On average, American burned USD 55m per day throughout the quarter, compared to its forecast of USD 70m per day. 

On the one hand, the cash burn dynamic has set off investor speculation that the company could file for bankruptcy some time in 2021 as it nears the end of its liquidity runway. In that case, the filing would take shape through a prepackaged bankruptcy and rightsizing of the capital structure – as opposed to a liquidation, the sources said.

“Liquidation is not a possibility,” one of the sources said, emphasizing the viability of American continuing as a going concern. “If we took out 20% or so of US capacity by taking American out, it would make sense right now since airlines are running on lowered capacity, but even a year down the line, if American didn’t exist, there would be more issues than solutions for the economy,” given that the missing capacity can’t easily be replaced. 

It wouldn’t be the first time the company resorted to Chapter 11 to clean up its obligations. American Airlines filed for bankruptcy in 2011 to cut costs – mainly labor – in the wake of the Great Recession with USD 4.1bn of cash on its balance sheet. The filing was viewed as proactive and the timing was unexpected by investors. 

On a recovery value basis, sources see value through the secured notes and EETCs as the capital structure stands. However, adding the recently raised CARES Act loan and the expected PIK notes to the debt stack could shake up recovery scenarios.

Indicative of the valuation outlook, American’s USD 2.5bn 11.75% senior secured notes due 2025 traded yesterday at 94.75 to yield 13.245%, down from trades last week at 99 to yield 12.013%, according to MarketAxess. 

The unsecured class in such a scenario could be poised to recoup recoveries in the form of a debt-for-equity swap, similar to the unsecured class’s treatment when the company emerged from bankruptcy in 2013.

The USD 750m 5% senior unsecured notes due 2022 last traded today at 66.375 to yield 32.614%, down from trades at 72.563 to yield 26.045% last week, according to MarketAxess. 

American’s nearest-term maturity is its USD 750m 5% senior unsecured notes due 2022. 

“If the company can also shed the unsecured debt, which seems likely in a bankruptcy scenario, that would go a long way,” one of the sources said. 

In the near-term, American announced 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. 

Liquidity bridge

On the other end of the spectrum, given the recent successful deals by Delta Air Lines and Spirit Airlines, some sources project American could add to its liquidity by raising debt against its AAdvantage loyalty program. 

Although the company has pledged the loyalty program to collateralize the USD 4.75bn CARES Act loan, sources predict the company could either raise more government funds against the program or tap the high yield market with a loyalty program-secured transaction and pay back the CARES Act loan with proceeds. 

Sources peg American’s loyalty program as more valuable than United’s MileagePlus program, but less valuable than Delta’s SkyMiles program. United was able to raise USD 6.8bn against its program, while Delta was able to raise USD 9bn against its program. 

American could raise between USD 7bn to USD 7.5bn of debt backed by AAdvantage, two of the sources said. Pricing-wise, American could have to pay closer to 8%-9% for a loyalty program deal, tight of its existing secured notes backed by slots, gates and routes, but wide of Spirit’s secured notes due to American’s greater exposure to international routes and higher leverage, the sources added. 

“The question is if American is going to pay that premium for the liquidity,” one of the sources said. 

For comparison, Spirit’s USD 850m 8% senior secured notes due 2025 traded today at 104 to yield 6.84%, down from trades last week at 105.731 to yield 6.363%, according to MarketAxess. 

If American earnings return to normalized levels, the capital structure should still be sustainable with single-digit leverage and positive free cash flow if the company focuses entirely on debt repayment rather than growth, two of the sources said. 

Pro forma an additional USD 7bn of hypothetical loyalty program notes, American’s debt load increases to roughly USD 46bn. Using USD 7bn of normalized EBITDAR, the company would be about 6.5x levered in a post-pandemic environment.

In a normal operating environment, the company should generate around USD 2.4bn of free cash flow (5.2% of total debt) through USD 7bn of normalized EBITDAR, USD 3bn of maintenance capex and roughly USD 1.6bn of interest expense.

Officials from American declined to comment.

2020 Debtwire

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