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United Airlines releases $ 2.25 billion in bonds



United Airlines abandoned an attempt to raise $ 2.25 billion in the bond market on Friday after three days of trying, after finding a salaried demand from investors that could have forced it to pay an interest rate of about 10 percent.

The bonds, supported by a pool of 360 aircraft owned by United, representing 40 percent of its fleets, were designed to repay a loan the airline secured from a group of banks in early March, when the coronavirus pandemic took hold outside China .

United did not give a reason to scrap the planned offer in an application with US securities regulators late Friday, but people familiar with the transaction said that the interest rate demanded by investors proved too much for the company.

“This deal was oversubscribed but at a higher price point,”

; said a person with direct knowledge of the deal. “The company decided they needed more time to think about it.”

A separate source familiar with the offer said that the airline expected a new chance soon to raise liquidity on better terms.

The failure to secure a deal came at the end of a volatile week for airlines, which began with a large sale of its shares following news that famed stock picker Warren Buffett had dropped its investments in the sector. US Treasury Secretary Steven Mnuchin also indicated that the federal government may keep its ban on international travelers entering the United States for an extended period.

United had announced on Wednesday that they would raise $ 2.25 billion through a three-year, $ 1 billion bond and a five-year, $ 1.25 billion bond.

Investors expressed their concern about the age of the airplane placed as collateral, according to people familiar with the discussions. Analysts and investors have generally asked questions about the value of older aircraft in a world where the airline’s international trade group estimates that there may be 35 percent more aircraft in service than justified by demand.

Bankers, who initially marketed the bonds with an average coupon of 9 percent, ultimately increased the return to around 10 percent to get investors on board. One person with direct knowledge of the deal said that the higher costs, together with change associations to protect investors, gave United pause.

The airline has been hit hard by a pandemic that sent passenger revenues falling to near zero and reported a pre-tax loss of $ 2.1 billion in the first quarter. It had $ 5.2 billion in cash and short-term investments at the end of March and $ 23.3 billion in debt. Nearly $ 15 billion has been wiped off the company’s stock valuation since the beginning of the year, with its shares falling 71 percent.

The unsuccessful collection stands out given the large debt that has been raised in the bond market in recent months. US companies have raised about $ 500 billion since the Federal Reserve announced at the end of March an outstanding move to buy corporate bonds. About $ 95 billion was raised over the past week, according to data provider Refinitiv.

United’s rival Delta Air Lines borrowed $ 5 billion through a bond offer in April in a deal secured with routes and airports, which paid investors a 7 percent coupon. Other indebted groups in hard-hit industries, including Norwegian cruise lines and its rival Carnival, have had to offer assets such as cruise ships as collateral to meet financing needs.

“There’s so much liquidity in the system right now – from the Fed, from the European Central Bank, from the Bank of Japan – and I don’t feel this is ready to stop in any way,” said Andrew Brenner, head of international interest rates at National Alliance Securities . “There’s a lot of money out there. It looks like it got too expensive for United, and it wasn’t worth the effort. “

United raised more than $ 1 billion at the end of April and sold equity and also took $ 5 billion from the US government’s $ 50,000 billion in the aviation rescue fund, most of which was a contribution, but 30 percent of it came in the form of a 10 -year loan initially, taxpayers pay an interest rate of 1 percent.

The company has said it expects to cut its workforce dramatically after September 30, when restrictions associated with US government support expire.

The company began burning $ 50 million a day in the second quarter and has said it hopes to reduce it to $ 40 million by the end of June. It tried to reduce its 15,000 employee hours from 40 a week to 30 but was reversed after the International Association of Machinists and Aerospace Workers voted on Tuesday.

United has applied for an additional $ 4.5 billion in secured loans from the Federal Rescue Fund but can wait until later this year before deciding whether to knock them.


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