United Leads U.S. Peers With $5 Billion Loan Against Awards Plan

(Bloomberg) -- United Airlines Holdings Inc. is planning to raise $5 billion by borrowing against its frequent-flyer program, pioneering a new tool for U.S. carriers to boost liquidity amid the Covid-19 pandemic.

Goldman Sachs Group Inc., Barclays Plc and Morgan Stanley have committed to provide the financing and arrange syndication, United said in a statement Monday. The deal, which is expected to close by the end of July, gives the carrier more financial firepower while allowing it to keep control over its MileagePlus customer loyalty program.

“Today’s update is clearly intended to put to rest any solvency concerns that investors may have had about United,” Credit Suisse Group AG analyst Jose Caiado said in a note to clients. The focus is now on the potential rebound in demand and earnings, he said.

The Covid-19 crisis is forcing loyalty programs into the limelight as airlines scurry for cash even if it means mortgaging key properties. Carriers are disclosing details such as valuation that were previously opaque, and additional borrowing efforts are in the works with American Airlines Group Inc. pledging the domestic assets of its AAdvantage program as collateral in talks to secure a $4.75 billion loan from the U.S. government.

United fell 1.6% to $39.04 at 2:10 p.m. in New York, paring deep losses earlier in the session after U.S. stock indexes rallied on the Federal Reserve’s plans to buy corporate bonds.

‘Most Disruptive’

In a separate regulatory filing, United announced plans to sell as many as 28 million shares through Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. At current prices, that would generate about $1 billion. United raised a similar amount in an April share sale.

United also expects to have access to $4.5 billion in loans from the government’s economic rescue package. Total liquidity will reach $17 billion by the end of September, excluding any proceeds from the share sale, the company said.

The MileagePlus deal will boost company finances during “the most disruptive financial crisis in the history of aviation,” United said. All or part of the loan facility can be replaced with privately placed debt securities, United said in a presentation.

United is turning to its rewards program after an effort last month to sell $2.25 billion of junk bonds fell flat with investors, who had concerns about the planes backing the debt. While the airline ultimately reached a deal, it decided to pull the transaction to seek more favorable terms and potentially a different structure later, Bloomberg News reported at the time.

Program Valuations

Using rewards programs as collateral instead of aircraft makes more sense in the current environment, said Helane Becker, an analyst at Cowen & Co. Many of the used jets that airlines have parked may have to be written down, given the current low demand for air travel. But the loyalty programs are “very valuable and are not going away; in fact they continue to increase in value,” she said.

Airlines have traditionally disclosed few financial details of their loyalty programs, including their primary source of revenue -- selling miles to banks that then use them to reward customer credit card use.

United valued its MileagePlus in the $20 billion range. American said last week that third-party appraisals have valued its AAdvantage program at between $19.5 billion and $31.5 billion.

A “significant portion” would be pledged for the government loan under the U.S. Cares Act, American said in a regulatory filing. The company has said it expects to reach an agreement by June 30. American is also working with Citigroup on a potential junk bond offering that may be secured by collateral including airport slots and gates, Bloomberg News reported.

United said it hasn’t yet decided whether it will take a federal loan. If it does, it said it expected to use available slots, gates and routes as collateral.

Demand Gains

Demand is improving in the U.S. and on some international routes after all but vanishing as the pandemic kept passengers home, United said. Customer cancellations have dropped 70% since the worst of the crisis in April. United also expects July passenger revenue to rise 50% to 100% compared with this month.

Revenue will tumble 88% in the second quarter from a year earlier, United said. Analysts expect a 90% plunge on average, according to data compiled by Bloomberg.

Average daily cash burn will be about $40 million in the second quarter and $30 million in the third quarter, United said.

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