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United Pulls $2.25 Billion Note Offering

By Lou Whiteman - May 9, 2020 at 10:44AM

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The airline was to use the fund raise to pay down other debts.

United Airlines Holdings (UAL -0.84%) after markets closed Friday said it would not proceed with a planned $2.25 billion notes offering amid rumors the airline was having a hard time attracting interest in the debt.

United on May 6 said it intended to do a private offering of notes in two series, one due 2023 and one due in 2025, to be secured by a designated pool of 360 aircraft. The airline intended to use the proceeds to repay the $2 billion aggregate principal amount outstanding under the term loan facility it entered into on March 9.

But the company in a regulatory filing Friday night backed away from the offering, without providing any explanation.

The decision seems to confirm market whispers that United was finding only tepid interest for the bonds, which would have forced the airline to raise the yield on the offering. Because United was essentially attempting to replace higher-cost term loan funding with what could have been lower-cost notes, if the rate it was forced to pay got too high there would be no reason for United to complete the offering.

Liquidity is still fine for now

United and other airlines have been scrambling to boost liquidity in response to the COVID-19 pandemic, which has caused travel demand to evaporate. United expects to fly fewer passengers in all of May than it did daily in May 2019, causing losses to mount.

The airline last week announced a $1.7 billion loss in the first quarter, and said it expected the current quarter to be far worse. But the airline as of close of business April 29 had $9.6 billion in total liquidity and expects to burn through $40 million to $45 million in cash per day in the second quarter.

A United Airlines 787 coming in for a landing.

Image source: United Airlines.

That burn rate is not sustainable indefinitely, but it does give the airline a fair amount of runway. Given its total liquidity, and the fact that the airline had intended to use the proceeds from the offering to pay down other debt instead of add to its cash balance, it would not appear the failed bond offering will impact United's survival chances.

Still, the failed offering is not good news. Shares of United were down 4% after hours on Friday following the news, giving back some of the stock's impressive 11.7% gain during the trading day.

A tough comparison

Even if the failed offering does not say much about United's outlook for survival, it might help place the airline in the pecking order of attractive airline issuers. The unsuccessful note sale comes just two weeks after rival Delta Air Lines boosted its debt offering by $2 billion because it was seeing such strong demand.

That is not necessarily a fair apples-to-apples comparison. United's issue was likely the planes it was using as collateral, as used aircraft are a hard sell in this environment where airlines are parking significant portions of their fleets. United has also provided the bleakest, or most candid, forecast for what might lie ahead, warning employees furloughs could be inevitable this Fall.

Still, it is a reminder that not all airlines are created alike. Delta is facing just as difficult of a challenge flying through this crisis as United, but Delta, along with Southwest Airlines, appears the most well-equipped to weather an extended downturn. It should not be a surprise that those airlines have better opportunities to tap markets for fresh funding.

Investors should be choosy too

There is a lesson here for investors. United is not in any immediate danger of going under, and I'm optimistic it fly through the crisis without running out of money. But the airline's future, and that of the entire industry, is uncertain, and there is real risk to buying in.

CEO Oscar Munoz on the post-earnings call with investors summed up the industry's predicament pretty well when he said: "It is certain that demand will return. Unfortunately, we just don't know when."

Airline stocks are trading at below one times trailing 12-month sales right now. The number is somewhat deceiving, because revenue figures are going to plummet as the year goes on. But if the companies are able to make it through the crisis with their equity intact, and demand does return eventually, there are opportunities here for a patient investor to make a fantastic return on the shares.

Given the risks accompanying those rewards, it is best equity investors, like debt buyers, to be choosy about what they purchase. For investors willing to brave buying airlines, I'd advise sticking with the Southwests and Deltas of the world instead of buying other names.

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