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American Airlines Seeks $2 Billion from Junk Bond Sale

By Rich Smith – Jun 19, 2020 at 2:31PM

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American could pay an 11% interest rate on its latest round of debt.

American Airlines Group (AAL -1.71%) is preparing to float $2 billion in junk bonds next week, hoping to shore up its balance sheet against the dangers of a drawn-out recession, reports Bloomberg.  

Junk bonds are corporate debt rated below "BBB" on the Standard & Poor's rating scale, or below "Baa" on Moody's rating scale. More simply put, a junk bond is any debt not considered "investment grade."  

American Airlines airplane in flight.

Image source: American Airlines.

The bond offering reportedly will consist of a five-year secured note yielding 11%, which cannot be repaid until the bond matures. These terms, however, are still being negotiated. 

What's most curious about this deal isn't that debt is being raised -- it's well known that the airline industry in general is not at the peak of health. However, it looked like American Airlines was helping to lead the industry back into health, announcing that, as early as July, it could be back to flying at least 55% of its pre-coronavirus schedule. American was the first airline to make such a positive prognostication, which may have led some investors to believe that the company was fully out of the woods. That does not appear to be the case, however.

Despite receiving $5.8 billion in payroll assistance from the U.S. government, a recent $1 billion term-loan from its bankers, and on Wednesday, announcing $360 million in new municipal junk bonds, American apparently still needs more cash. Next week, we'll see if they get it.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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