American Airlines was able to tighten talk and upsize the scope of its refi offering this morning as the market rushed to support new paper backed by the company’s most valuable assets, according to seven sources following the company.

Lead Goldman Sachs upsized the five-year USD 2.5bn secured notes to USD 3.5bn and the eight-year USD 2.5bn secured notes to USD 3bn. Official talk for the five-year notes is circulating in the 5.75% area, tight of whispers in the low to mid-6% area, while the eight-year notes are talked at 6% area, tight of whispers in the mid- to high-6% area. Books are expected to close at 11am ET, with pricing expected thereafter. 

Meanwhile, lead Barclays upsized the USD 2.5bn term loan due 2028 to USD 3.5bn and tightened talk to Libor+ 475bps with a 0.75% floor and 98.5-99 OID. Previous talk was at Libor+ 500bps-525bps with a 1% floor and 98 OID. Commitments were accelerated to 12pm ET today.  

All tranches of the debt are rated Ba2 by Moody’s and BB by Fitch Ratings. 

Based on where the other airlines are trading, talk could still be tightened further as much as to the 4.5% area and still be a good buy, five of the sources said. 

The amortization structure is similar to other loyalty program-backed deals such Delta Air Lines and United Airlines, the sources said. 

The loan is interest-only for two years and then 20% per year starting from the third year. The expected weighted average life of the loan is 4.7 years. 

The five-year bonds are also interest-only for two years and then 33% per year starting from year three with the expected weighted average life of the bonds at 3.7 years. The eight-year bonds are interest-only for five years and then 33% per year starting from year six with the expected weighted average life of the bonds at 6.7 years. 

“The maturities for IO amortization schedules are more in line with the WAL or the weighted average life. We think it’s a better play because it shortens the life of the bond and therefore your exposure,” one of the sources said. 

Air Lift

Proceeds from the transaction will be used to bolster liquidity in place of the USD 7.5bn in government loans available to American under the CARES Act. 

Pro forma the transaction as is, the company is 19.33x levered through USD 40.382bn of pro forma total debt and USD 2.089bn of LTM 2020 adjusted EBITDA. 

Pro forma liquidity stands at USD 16.8bn, due to American’s increased loan allocation under the CARES Act, the renewal of the government’s payroll support program, and recently announced equity issuance. 

Congress’ extension of the payroll support program in December 2020 provided American with roughly USD 3.1bn in cash through a combination of grants and loans. American also announced a USD 1.1bn at-the-market equity issuance program in January. 

Liquidity for American and other airlines could be further supported by a third round of government support under the Payroll Support Program, three of the sources said.

The House Financial Services Committee approved a plan to include USD 14bn in extended payroll support for airlines in President Biden’s proposed COVID relief bill. If approved, American could expect to receive another USD 3bn or more through a combination of direct grants and low interest loans. 

In tandem, industry sources expect leisure travel to return to at least 50% of normalized levels by the summer and fully return in 2022. Business travel, however, could take longer to return, especially on the international side, well into the end of 2022 to 2023, three of the sources said. 

The company expects to burn USD 30m operationally per day during 1Q21, according to the company presentation. Annualized, that would lead to a cash burn of USD 10.9bn for 2021.

However, as travel rebounds further, sources project a cash burn of USD 500m for 2021 through USD 3bn of adjusted EBITDA, USD 2bn of capex and USD 1.5bn of interest expense. 

Theoretically, if earnings return to 2019 levels – USD 7bn in EBITDAR – American would be around 5.7x levered based on its current debt balance of USD 40.382bn.

Sources place American wider than Delta and United due its higher debt load and lower ratings. 

Delta’s Baa1/BBB (Moody’s/Fitch) SkyMiles-backed USD 2.5bn 4.5% senior secured notes due 2025 traded yesterday (9 March) at 106.118 to yield 3.071%, compared to trades at 108 to yield 2.667% in mid-February, according to MarketAxess. 

United’s Baa3/BBB- (Moody’s/Fitch) MileagePlus-backed USD 3.8bn 6.5% senior secured notes due 2027 traded yesterday at 108.75 to yield 3.866%, compared to recent trades at 109.5 to yield 3.564%. 

Barclays declined to comment. Goldman Sachs and American did not respond to requests for comment. 

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