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Updated 19 May 2020: United Airlines has scrapped this bond issue after it failed to receive the interest needed to proceed.
Towards the end of last month, United Airlines announced that it was planning to raise $1.1 billion from a public stock offering to go alongside the $5.0 billion the airline has received from the US government and now the airline is heading back to the markets to raise yet more cash. This time it’s cash that it needs to pay down an existing loan.
On 9 March 2020 United Airlines announced that it was raising $2.0 billion via a term loan facility to allow it to pay “certain transaction fees and expenses and for general corporate purposes” (i.e run the airline) with the loan set to mature on 8 March 2021.
Less than two months later, United now says that it plans to raise $2.25 billion via a private bond offering to allow it to repay the original loan facility early.
Here’s the main body of the announcement:
Today, United Airlines, Inc. (“United”) announced that it intends to commence a private offering to eligible purchasers of $2.25 billion in aggregate principal amount of two series of notes, the senior secured notes due 2023 and the senior secured notes due 2025 (the “Notes”), subject to market and other conditions. The Notes will be guaranteed by United’s parent company United Airlines Holdings, Inc.
United intends to use the net proceeds from the offering of the Notes to repay the $2.0 billion aggregate principal amount outstanding under the term loan facility that United entered into on March 9, 2020 and, to the extent that any net proceeds remain, for general corporate purposes. The final terms and amounts of the Notes are subject to market and other conditions and may be materially different than expectations.
The Notes will be secured initially by first priority security interests in a designated pool of 360 aircraft owned by United.
Based on the numbers provided (and on average) each aircraft that is being used as security for the bond issue is being valued at $6.25m.
With bonds generally charging a lower rate of interest than short-term loans and with these particular bonds offering a longer repayment period than the original loan, it’s probably safe to assume that this is a cost-cutting measure by United.
Assuming the cost to issue and finance the bonds is considerably lower than the interest payments being charged by the original loan plus any penalty fees for early repayment, this seems like a sensible move by United – why pay out any more than you have to at a time where every dollar counts?
I have no idea which aircraft are being used as security to back the bond issue…but I’d love to know. $6.25m per aircraft seems like a low figure to me so I presume the pool contains a sizeable number of smaller and/or older aircraft.
Net of the original $2.0 billion loan facility, United has now raised (or has been given) $8.35 billion since the beginning of March but it is still poised to cut over 3,400 jobs by the beginning of October – that fact alone should give everyone a pretty good idea of just how hard the airline industry is being hit right now.