JetBlue Airways (JBLU +3.93%) charted a course for the debt market this week, raising more than $3 billion through a series of three deals.
The money raised will be useful to refinance some debt coming due in the years to come and as a cushion against a potential downturn. But it also changes the airline's leverage profile. Investors are concerned, sending JetBlue shares down 22% for the week as of Thursday afternoon, according to data provided by S&P Global Market Intelligence.
Stockpiling cash in an uncertain environment
JetBlue is navigating through some difficult headwinds. The airline industry is experiencing falling consumer demand, which is eating into pricing, and smaller carriers like JetBlue are feeling it more than their larger rivals.
This week, JetBlue said a subsidiary, JetBlue Loyalty LP, sold $2 billion in senior secured notes due in 2031 (paying interest at 9.875%) and a $765 million senior secured term loan due in 2029. The company also priced $400 million in five-year convertible notes paying 2.5%.
JetBlue will use the proceeds in part to buy back a portion of existing senior convertible notes due in 2026 and for general corporate purposes. The capital raised should be enough to pay all of JetBlue's planned capital expenditures through 2025 and provide a caution should conditions worsen from here.
The added cash is a plus, but investors were worried about the added interest expense that comes with it. Analysts at TD Cowen estimated that the higher debt balances and payments would cause earnings to drop by $0.10 per share in 2024 and more than $0.30 per share in 2025 and 2026, reducing the likelihood that JetBlue will be profitable during much of that time.
Two credit agencies also reacted. Following the deal announcements, Standard & Poor's and Moody's downgraded JetBlue's debt to B- and B3, respectively.
NASDAQ: JBLU
Key Data Points
Is JetBlue a buy?
The concerns about leverage are appropriate, and JetBlue does appear to have taken on more than enough debt to cover near-term capital needs. That said, the airline industry is notoriously cyclical, and JetBlue was ill-prepared for an extended drop in demand should that happen in the quarters to come.
With that in mind, considering some prepayment options are baked into the terms should JetBlue outperform and generate more cash than the company currently expects in the years to come, the offering appears prudent.
However, JetBlue remains a troubled company in a difficult operating environment. Even if it can fly through this turbulence, there isn't a compelling reason to buy in right now.
