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,
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
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
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
founder of corporate credit fund manager PennantPark Investment Advisers.
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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
said at the conference.
Write to Matt Wirz at [email protected]
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