American Air Borrowing $7.5 Billion in Loyalty-Backed Debt

American Airlines Group Inc. is kicking off a $7.5 billion sale of bonds and leveraged loans backstopped by its frequent-flyer program, capitalizing on low borrowing costs to repay U.S. government loans that have helped it navigate the pandemic.

The carrier is marketing two $2.5 billion series of notes maturing in 2026 and 2029, and a term loan credit facility of the same amount due in 2028, according to a news release. The new debt, which is secured against the company’s loyalty program, will help refinance American’s $7.5 billion Treasury loan, of which $550 million has been drawn to date, according to an investor presentation Monday.

Early pricing discussions are in the low-to-mid 6% range for the five-year notes, and the mid-to-high 6% range for the eight-year portion, according to people familiar with the matter, who asked not to be identified discussing a private transaction. Initial pricing on the loan is being discussed at a spread of 500 to 525 basis points over the London interbank offered rate, plus an original issue discount of 98 cents on the dollar with a 1% Libor floor, the people added.

American opted to refinance the Treasury loan with debt in an amortizing structure, which allows the company to pay back it in pieces leading up to maturity rather than all at once. The new financing gives American greater flexibility and also potentially increases the borrowing capacity of the AAdvantage program, a company spokesman said.

The airline is returning to the market at a ripe time for borrowers: Funding costs are at historically low levels and risk appetite has been soaring as investors rush to get their hands on higher-paying assets. American borrowed $2.5 billion in June at an all-in yield of 12%.

Barclays Plc is leading the loan deal and held a call with potential lenders earlier on Monday. Goldman Sachs Group Inc., which is leading the bond sale, was sounding out potential investors earlier this year for the deal, Bloomberg reported in February, after helping United Airlines Holdings Inc. with a similar debt offering in June.

Representatives for Barclays and Goldman Sachs declined to comment. The bond sale is in marketing through March 10 and expected to price thereafter.

Read more: Junk Rally Turns Into a Distressed Debt Grad Party

American’s AAdvantage loyalty program has an assessed value of $18 billion to $30 billion, the carrier said in May, when it was negotiating with the Treasury Department to use at least part of the asset as collateral for the loan. The carrier mortgaged its brand with $1.2 billion in committed financing from Goldman Sachs in July.

American has about $3.6 billion in unencumbered assets and additional first lien debt capacity of $7.2 billion, according to the presentation. It said its overall cost of debt is around 4% and has an estimated $15 billion of liquidity.

Fitch Ratings rates the new debt BB with a negative outlook. It downgraded American’s secured debt rating one notch to B, five steps below investment grade, as a growing amount of such borrowings may dilute recovery prospects in a distress scenario, according to a report Monday. Fitch removed the company from negative watch given bolstered liquidity and a vaccine rollout that will likely increase air travel.

Other airlines have also been raising debt to help repay Covid-19 rescue funds and loans. Deutsche Lufthansa AG sold $1.9 billion of bonds in February to partially repay a state aid package, while United borrowed $3 billion in October to repay $2.75 billion of debt that it sold last year.

©2021 Bloomberg L.P.

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