United Airlines used an innovative structure that ring-fences the intellectual property and cashflows of its highly regarded loyalty programme, MileagePlus, in a bankruptcy-remote vehicle to raise US$6.8bn in the US high-yield bond and loan markets last week.
The airline took to debt markets to take out US$5bn of committed bank financing that was part of a plan to shore up its liquidity as it continues to burn around US$40m of cash per day.
It came after the airline abandoned a US$2.25bn bond offering on May 8 that was secured against a fleet of aircraft.
MileagePlus has over 100 million members and generated US$1.83bn of earnings in 2019 – accounting for 26% of United's overall earnings that year, the company said.
"The mileage programmes for airlines are effectively their cash cow," said Parmi Chadha, high-yield portfolio manager at Newton Investment Management.
"If United Airlines exists in any form – pre or post-bankruptcy – this business is absolutely crucial to them and if you have a first lien against this at a fairly low loan-to-value I think it's fairly attractive."
Order books were heard by several investors at over US$10bn across what was initially a US$3bn seven-year non-call three secured bond and a US$2bn seven-year term loan.
On the back of that demand leads upsized the bonds to US$3.8bn and the loans to US$3bn.
The bonds were priced with a coupon of 6.50%, at the tight end of talk, with a discounted price of 98.75 for an all-in yield of 7.00%.
The loan was priced to yield 7.03%.
Goldman Sachs was sole structuring agent and lead-left on the financing with Barclays and Morgan Stanley acting as joint bookrunners.
United's attempt at an aircraft-backed bond in May had been led by JP Morgan and Citigroup and the price talk on the three and five-year bonds in that deal was upwards of 10% before it was scrapped, with investors balking at the age of the aircraft in the deal.
The MileagePlus deal was structured in a unique way, ring-fencing the MileagePlus intellectual property in a special purpose vehicle that is intended to be bankruptcy remote giving investors some comfort.
It gives investors security over the intellectual property as well as a first lien on all cashflows through the loyalty scheme.
"The IP assets are outside the control of United to ensure the programme stays outside of a potential bankruptcy of United and outside the direct control of the airline and bankruptcy court," wrote Fitch in a ratings report.
The structure helped the deal obtain investment-grade ratings of Baa3/BBB–, although the parent company is junk-rated at Ba1/BB– and airlines in general face a difficult path ahead as travel demand recovers from a total shutdown.
"The trajectory of these businesses in the next 12–24 months is obviously going down," said Chadha. "I don't see this as an IG bond. I see it more as a high-yield bond with a comprehensive collateral package."
The bonds have a two-year interest-only period, with the notes starting to amortise in the third year, giving them an expected weighted average life of 4.7 years.
One investor looking at the deal said that investors would usually prefer longer duration, but given the challenges facing the airline sector this shorter structure gives them a bit more comfort.
The new notes include a financial covenant that requires the parent company to maintain at least US$2bn of liquidity.
Before the deal was upsized, the airline said it expected to have US$17bn of total liquidity by the end of the third quarter.
In addition to the US$5bn of committed MileagePlus debt – at initial size – the company said it expected to be able to draw US$4.5bn from the CARES Act loan programme, which would be secured against slots, gates and routes collateral.
"This US$9.5bn of additional liquidity will provide even more flexibility as the airline navigates the most disruptive financial crisis in the history of aviation," the company said.
The bond and loan offering came in a busy week for airline issuance, with American Airlines raising US$2.5bn in a five-year secured bond offering at 11.75% on Wednesday, while Alaska Air raised US$965m at 4.8% – its first public bond offering – on Tuesday in an enhanced equipment trust certificate structure.
"It is very important for all of these companies to access capital however they can," said John McClain, portfolio manager at Diamond Hill Capital Management.
"The government is the lender of last resort and they have made that clear. Airlines are going to need to show a good faith effort in securitising basically every asset they have."