- American joins Delta and United in raising billions of dollars backed by its loyalty program
- The airline’s new deal is one of the industry’s largest after demand reached roughly $46 billion
- Investors love the cash flow of loyalty programs that protect them from depressed demand for travel
- See more stories on Insider’s business page.
Embattled American Airlines is closing in on one of the largest airline financings ever seen in the debt capital markets.
American is finalizing a $10 billion transaction in bonds and leveraged loans backed by its loyalty program AAdvantage, that will repay loans the US Treasury extended in the aftermath of the coronavirus pandemic last year, according to sources familiar with the matter.
Airlines have been hobbled by a pandemic that’s slashed demand for overseas travel and brought business trips to a halt. American and its peers have raised billions of dollars in the capital markets to stay airborne on the back of friendly central bank policies that have kept borrowing costs low.
But after exhausting lenders for extra credit, airlines and their bankers are looking to lucrative frequent flyer programs to raise more cash to service their operations and stay solvent amid one of the airline industry’s worst-ever crises.
American’s new deal leverages a loyalty program that generated almost $6 billion in cash sales in 2019, according to a Monday filing with the US Securities and Exchange Commission. That cash flow, combined with a bankruptcy-remote structure has investors lining up out the door for a piece of these bonds and loans.
Investor requests, or orders, for the bonds reached $36 billion on Wednesday, while demand for the loans was at least $10 billion, according to a senior banker familiar with the transaction. This demand was more than enough for American to increase the transaction from $7.5 billion.
“Investors are asking management to ensure their allocations [in the bonds and loans] are protected. Hundreds of them are dialing in, wanting to participate,” the banker said.
Goldman Sachs is arranging the $6.5 billion in bonds, while Barclays is leading proceedings for the $3.5 billion in leveraged loans, sources said.
The bonds, which mature in five and eight years, and the seven-year loan could offer up to 6% in returns.
Spokespersons for American and Goldman declined to comment beyond public statements, while a spokesperson for Barclays did not respond to a request for comment.
What’s the price of loyalty?
While there’s no certainty that airlines’ revenues will rebound to 2019 levels, investors can take solace in the water-tight structure of American’s new deal.
Like previous offerings from Delta and United, American’s financing traps AAdvantage revenues in a special purpose vehicle (SPV).
The airline then receives the funds from the bonds and loans through intercompany loans from the newly-established SPV. Investors, importantly, are repaid through revenues from the SPV, which is bankruptcy-remote, meaning that lenders are repaid should American default on its payments.
And last year, peers United and Delta set a strong precedent by raising $6.8 billion and $9 billion against their loyalty programs, respectively.
Frequent flyer programs are stacked with value and importantly, they generate cash independent of demand for passenger travel.
About 74% of AAdvantage’s cash sales came from credit card partnerships with Citi and Barclays, alongside other links the airline has in travel and retail, American said in its SEC filing. Credit card issuers buy air miles from carriers as spending incentives for their customers.
This diversity outside of passenger tickets has enabled American to broaden their “toolkit” in raising capital, Jonathan Root, a senior vice president at Moody’s Investors Service, told Insider.
“Historically, loyalty programs were not a source of capital for airlines. It’s usually other assets like airport gates, or pledges on airlines’ routes,” said Root. “Loyalty programs may not crowd out [airlines’] other future sources of debt, but it’s certainly expanded their ability to raise capital.”
A boon for Barclays, Goldman
Barclays and Goldman have concocted the lion’s share of airline-linked debt deals in the capital markets in the last 12 months.
Last June, Goldman’s work on United’s $6.8 billion MileagePlus transaction led to a similar deal for Delta’s $9 billion effort in September, Matt McClure, Goldman Sachs co-head of global industrials told Insider in December. The Delta-SkyMiles deal comprised $6 billion in bonds led by the US bank and Barclays led the $3 billion loan.
Goldman also helped United nab more bond debt by leveraging the airline’s loyalty program after the airline’s initial attempt failed.
Barclays put together emergency financings in the capital markets for JetBlue, Allegiant Air, and Spirit last year.
Investors that rejected previous deals for cash-strapped airlines renewed interest in the beleaguered sector once loyalty programs were factored into the equation, according to a second source familiar with the sector.
And now, work is underway to replicate this structure in other industries such as retail and hotels that court customers through loyalty programs.
“There are consumer-oriented companies with credit card-linked programs and it would be a great idea to use these loyalty programs,” they said.
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