Shares of United Airlines Holdings (NASDAQ:UAL) fell more than 6% on Wednesday after the airline turned to equity markets to raise $1 billion in additional capital. The sale provides much-needed added liquidity, but United is selling the stock at prices significantly below levels where it was buying the shares last year.
After markets closed Tuesday, United said it would sell 39.25 million shares at $26.50 apiece, with an option for the underwriters to buy an extra 10% based on demand. The sale was completed at a price 5% below the stock's $27.88 at Monday's close.
Airlines have been hit hard by the COVID-19 pandemic, with travel demand off by more than 90% year over year. On Monday, United preannounced a preliminary first-quarter loss of $2.1 billion, well above the $459 million analyst consensus, due in part to a $1 billion special charge tied to a decline in the value of United's investment in Colombia's Avianca Holdings.
There's no doubt United could use the extra cash. The airline expects to take in about $5 billion in funding through the U.S. government's payroll support program, including a $1.5 billion loan with an interest rate of 1% in the first five years. It also intends to apply to borrow another $4.5 billion from the U.S. Treasury as part of a separate $25 billion program, but executives have warned employees that if travel does not return by the fall, significant layoffs are possible.
Still, investors are likely disappointed to see their shares diluted given how far the stock has fallen this year. Shares of United are down 70% year to date and are significantly below where they traded last summer, when United said it had repurchased more than $500 million worth of shares at an average price of $84.07 per share.
Hindsight is obviously 20/20, but United management and shareholders would certainly love to have that cash used to repurchase shares in recent years available today instead of having to sell new shares near a multiyear low. United and the airlines are, at best, likely looking at a multiyear recovery ahead.
The stock sale is arguably a good sign for long-term holders worried about getting wiped out in a potential bankruptcy, as United has demonstrated that airlines still have levers to pull to access capital. Management says United has about $20 billion in assets available as collateral if additional debt is required.
That's good news relative to the worst-case scenario. But given the difficult path ahead for United, investors are in no mood to celebrate on Wednesday.