United Airlines Shifts $1.5 Billion From Bonds to Loan Offering

(Bloomberg) -- United Airlines Holdings Inc. has shifted the majority of its $9 billion junk-debt sale to leveraged loans, the latest company to seek more flexible financing in the floating-rate assets.

The size of the bonds shrunk to $4 billion total, split evenly between five- and eight-year maturities, according to people familiar with the matter. The term loan due 2028 has now grown to $5 billion, up from $3.5 billion, the people said, asking not to be identified discussing a private transaction.

United follows in the footsteps of recent deals by Michaels Cos. and Triton Water Holdings Inc. that recently favored loans over bonds. Borrowers often prefer leveraged loans because they allow companies to prepay debt with little-to-no penalty, while bonds typically require a fee to repay investors before the maturity. United’s loan has more restrictions than usual since it can’t be repaid for one year unless investors are compensated for missed future interest payments, but the bonds can’t be repaid for the entire length of the maturity without a similarly costly fee.

Leveraged loans have seen fierce demand from funds that have taken in cash for 13 consecutive weeks, the longest streak since 2018, as well as from collateralized loan obligations, the biggest buyers of the risky debt, following record issuance. Loan prices have also been rising, hovering near the highest level in more than two years, as investors turn to floating-rate products for higher returns amid rising Treasury yields.

United was able to score cheaper borrowing costs on the bonds after drawing about $25 billion in orders as of Tuesday. The five-year portion is now being marketed at a yield of 4.375%, down from the low-to-mid 5% range initially. The eight-year tranche now sits at 4.625%, lower than the original mid-to-high 5% discussions.

The company received lower pricing on the loan as well, at a comparable yield of 4.58% according to Bloomberg calculations, in the middle of where the two bonds are being discussed. The loan on Wednesday tightened to 375 basis points over the London interbank offered rate, and set a smaller discounted price of 99.5 cents. It kept the 0.75% Libor floor.

The total $9 billion transaction will bolster liquidity and refinance outstanding obligations, including a loan the airline took from the U.S. government to help it through the pandemic. The amount of debt being refinanced comes to just under $3 billion, meaning the bulk of the new funds will be added to United’s balance sheet for general corporate purposes.

United’s stock traded up about 2.7% Wednesday morning at $58.18 at 9:52am in New York. The bonds and loan are expected to price Wednesday.

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