Written by: Gary Ashton
Last week Delta Air Lines (NYSE: DAL) announced the largest debt deal in history for an air carrier with a total borrowing of $9 billion. According to a company press release, the company will issue $6 billion in senior secured notes due 2025 and 2028 and a credit agreement providing for a $3 billion term loan facility. The final $9 billion amount is a $2.5 billion increase from the anticipated original debt size. Such an extensive borrowing has many investors wondering if the company may have taken on more debt than it can handle.
Delta is rated BB by Standard and Poor’s, and they affirmed it in July 2020, but there is a wide range between the secured debt rating of BBB- and the unsecured rating of BB-. Delta’s new debt is secured, with the airline’s SkyMiles frequent flyer program forming part of the package. The fact that creditors have security over some of the company’s assets, and the secured debt rating is technically investment grade, might be why borrowing costs were kept low at a blended average annual rate of just 4.75%.
Nevertheless, one must wonder where is all this going? Is Delta getting in over its head by taking on so much debt? COVID-19 has incredibly hard hit the travel and leisure sector, undoubtedly, and the airline industry is on the front line. But like other airlines, Delta is adjusting. In a June 19 investor presentation, the airline said they have reduced their daily cash burn to $30 million from $100 million at the end of March 2020 and has a goal to reduce average daily cash burn to zero by year-end.
Furthermore, the company reported that it had over $15 billion of cash on hand as of 30 June, so why do they need another $9 billion? Delta said they are targeting $10 billion of liquidity by year-end. With this additional borrowing, liquidity could be twice that by year-end.
Delta is not the only airline to leverage its frequent flyer program to raise much-needed cash. United Airlines (NASDAQ: UAL) used its Mileage Plus program to back new borrowings, and financial press reports suggest American Airlines (NASDAQ: AAL) has plans to post its AAdantage program as collateral for a possible US government loan.
Barrons.com reported last week that Delta might fire fewer pilots than previously anticipated. The airline now expects to permanently layoff 1,721 flyers instead of the previous number of 1,941. Keeping more pilots employed could be a sign that business prospects are improving for the airline. The agreement is still subject to a pilot union review this week. Cutting staff costs is a step forward to help an airline still struggling due to lackluster air travel demand – mainly the lack of demand for the more profitable business class travel.
Investors need to ask themselves, has Delta turned the corner or is more turbulence ahead. Perhaps having such a larger liquidity cushion is an excellent idea to weather the storm, but at the end of the day, the company needs to generate the cash required to pay back all that debt.
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