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United’s Banks Map Debt Plan That Shields Frequent-Flyer Plan

United Air Pawns Frequent Flyers in Debt Plan to Outlast Covid

(Bloomberg) -- United Airlines Holdings Inc. is tapping its frequent-flyer program for its biggest debt sale since the pandemic. The pitch? Its miles are a safer bet than the actual airline.

A group of banks led by Goldman Sachs Group Inc. plans to offload the debt to investors through an offering of leveraged loans and secured bonds that could be completed before the July 4 holiday in the U.S., according to a person with knowledge of the matter who asked not to be named because they’re not authorized to speak publicly. The unique structure could even see the debt given one investment-grade rating, the person said.

The lenders agreed to provide $5 billion of loans to United in exchange for a claim on MileagePlus, the loyalty program the airline established in 1981. They’re now trying to convince investors to buy into the idea even as hundreds of planes sit idle on tarmac amid a collapse in travel demand.

The debt will be issued through bankruptcy-remote entities that United created to house the mileage program, and which is separate from the air carrier’s operations. MileagePlus derived 71% of its cash flow in 2019 from third parties such as credit card companies that award miles to their clients, according to a company presentation. Miles earned by United passengers from flights accounted for the remaining 29%.

United said revenue for its mileage program has been resilient during downturns when its own performance has declined. During the 2008-2009 recession, revenue for MileagePlus fell by 2%, compared to a 19% drop for the company as a whole, according to the presentation. United valued its MileagePlus program at around $22 billion, almost double its current market capitalization of $11.7 billion.

Because the financing is structured in a way that protects MileagePlus from the rest of United and contains provisions that prioritize debt repayment, the offering is expected to receive ratings that are higher than those of United. The company is rated two notches below investment grade by Moody’s Investors Service and three steps below by S&P Global Ratings and Fitch Ratings.

A representative for Goldman Sachs declined to comment. A representative for United didn’t respond to requests for comment.

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.

Other airlines have sought to monetize their miles in the past. Avianca Holdings SA, one of the largest airlines in Latin America, mortgaged its LifeMiles program in 2017. When the carrier filed for Chapter 11 bankruptcy last month, LifeMiles was spared. But Moody’s downgraded the debt to seven levels below investment-grade on expectations that LifeMiles would be temporarily hurt by the pandemic through its impact on consumer spending, traveling and economic growth.

©2020 Bloomberg L.P.