American Airlines Joins Debt-Market Behemoths
March 17 2021 - 5:59AM
Dow Jones News
By Matt Wirz
American Airlines Group Inc. raised $10 billion of debt last
week to repay government loans and keep its business running as the
economy recovers. The deal also boosted the company's debt by about
20%, transferring much of that risk onto debt investors.
American has survived the pandemic by taking on $22 billion of
new debt, bringing its total obligations to $50 billion. Borrowing
saved the company--and others like Carnival Corp. and AMC
Entertainment Holdings Inc.--from bankruptcy, but it comes with
higher interest costs that could affect profitability for years to
come.
The deal has freed American of its obligations to the U.S.
taxpayer and positioned the company to benefit from a potential
economic boom the likes of which Wall Street hasn't seen in
decades. Economists have boosted forecasts for economic growth this
year to about 6% in response to the $1.9 trillion Covid-19 relief
package Congress passed this month. American's shares have risen
55% this year as domestic travel bookings picked up.
"For the first time since the crisis hit...we at American are
not looking to go raise any money," American's chief executive,
Doug Parker, said Monday at a conference hosted by JPMorgan Chase
& Co. Even after accounting for roughly $30 million of cash
burned each day, American expects to have $17 billion of liquidity
at the end of March and no major debt coming due until 2023.
Mr. Parker called the $6.5 billion of bonds and $3.5 billion of
loans American issued on March 10 "the largest transaction in the
history of commercial aviation." If the transactions are completed
on March 24, as expected, American would have enough debt to rank
as the second-largest borrower in a widely followed index of
corporate loans, up from 16th in January 2020, according to data
from S&P Global Market Intelligence.
"You've done a fantastic job raising liquidity," JPMorgan
analyst Mark Streeter, told Mr. Parker at the conference. "The one
thing that hasn't changed, though, is you still have this massive
debt burden." Investors still ask Mr. Streeter, "'Isn't some sort
of an American restructuring inevitable?'," he said.
American already had more debt than competitors such as Delta
Air Lines Inc. and United Airlines Holdings Inc. before the
pandemic because it had borrowed for share repurchases and to
modernize its fleet--part of a then-record surge in corporate-bond
sales. The coronavirus briefly disrupted debt markets before
intervention by the Federal Reserve and the advent of vaccines
stoked appetite from investors who are earning minimal yields on
government bonds, boosting corporate-debt issuance to new
highs.
The new financing, which is backed by American's frequent-flier
program, offered a blended yield of about 5.66% and attracted about
$45 billion of orders from investors, people familiar with the
matter said. Comparable Delta Air Lines bonds traded at a yield of
around 3% at the time, according to data from MarketAxess.
Sound Point Capital Management bought into American loans in
recent months because they offer attractive yields given the
company's improving outlook and the dwindling risk of bankruptcy,
said Rick Richert, head of the firm's U.S. loan-investing unit.
Still, Sound Point is buying only loans backed by valuable assets,
like the frequent-flier program and American's South American
routes, which will hold their value better in a downturn, he
said.
Others are lending to American indirectly in private markets.
Oaktree Capital Management LP has committed to invest $350 million
this year in aircraft-leasing company Azorra Aviation Holdings and
their first deal is a $60 million financing of regional jets for
American, people familiar with the matter said. Returns on
private-equity investments in aircraft leasing range from 12% to
15%, they said.
Some investors worry that even when the pandemic recedes, the
business travel that makes up a large portion of American's
business might not fully recover.
"One of the key questions coming out of all this is, If you're a
travel-related business, will you ever be worth what you were
pre-Covid or will you be worth, say, 70% of pre-Covid levels?" said
Art Penn, founder of corporate credit fund manager PennantPark
Investment Advisers.
American's balance sheet is a concern because the airline
industry is prone to booms and busts--most large U.S. carriers
filed for bankruptcy over the past two decades--and the bigger the
debt burden is, the less cushion there is to weather lean times.
The new debt deal will boost American's annual interest expense by
$500 million to $600 million, said Mr. Parker, the CEO.
That will be offset by $1.3 billion of cost savings the company
achieved over the past year through management cuts and labor
changes, and American plans to start paying down debt once it
starts generating cash again. The timing depends on when the
company sees itself emerging from the pandemic and entering a
sustained recovery, Chief Financial Officer Derek Kerr said at the
conference.
Write to Matt Wirz at matthieu.wirz@wsj.com
(END) Dow Jones Newswires
March 17, 2021 05:44 ET (09:44 GMT)
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