What happened
Shares of American Airlines Group (AAL 0.35%) traded down 7% at noon EDT on Tuesday after the airline priced new debt and equity offerings, raising $2 billion in additional capital but at a cost to existing shareholders.
So what
American and other airlines have been scrambling to raise cash to weather the pandemic. Travel demand fell by upward of 90% in March and April, and although there are some encouraging signs that demand is beginning to bounce off of that bottom, it will likely take years for traffic to return to pre-pandemic levels.
Image source: American Airlines.
American came into the crisis as the airline with the most debt on its balance sheet and expects to burn through about $40 million per day in June. The airline hopes to get its cash bleed down to zero by the end of the year, but with the threat of a pandemic second wave still out there, the safest thing to do is to raise as much cash as possible.
The airline did just that on Tuesday, saying it raised $1 billion selling stock at $13.50 per share along with $1 billion in convertible notes. The share price is a 9% discount to Monday's close, as is typical in secondary offerings.
American is also trying to raise about $1.5 billion in bonds, but according to Bloomberg might have to pay upward of 12% interest to get the deal done.
Now what
Secondary offerings by their nature mean individual shareholders own a smaller sliver of the company, and typically put near-term pressure on the stock. In that regard, Tuesday's sell-off is no surprise. But long-term holders shouldn't be upset that American did this offering.
Shares of American, down more than 70% in May, have rebounded somewhat but are still down by more than 50% year to date. There's still real risk that a second wave will reverse the momentum we have seen in bookings, and starve the industry of revenue once again.
In the worst-case scenario, American could still run out of cash and be forced into bankruptcy. That would likely mean shareholders would be wiped out. With that as a potential alternative, a 7% drop after raising billions in new capital seems a small price to pay for existing investors.
