Delta bonds fly high on scarcity value

Delta Air Lines locked in low funding costs on Monday after investors took a shine to a rare senior unsecured offering from the airline, its first in over a year.

By William Hoffman

NEW YORK, Oct 23 (IFR) - Delta Air Lines locked in low funding costs on Monday after investors took a shine to a rare senior unsecured offering from the airline, its first in over a year.

The US$1.5bn two-parter comprising five and 10-year paper saw orders swell to US$3.4bn, allowing the borrower to price on or inside its existing curve.

The deal brought some well needed liquidity to a sector where there are just US$8.2bn of senior notes outstanding from airlines such as Delta (Baa3/BB+), Southwest Airlines (BBB+/A3/A-), American Airlines (BB-/BB-), and United Airlines (BB/BB).

Junk-rated airlines more commonly tap the capital markets with enhanced equipment trust certificate notes, which are secured against the planes they own to achieve higher ratings and lower costs.

Senior unsecured notes are far less common.

For investors this deal presented an opportunity to buy into rarer senior unsecured paper that offered a pick up to existing airline bonds of a similar structure.

"We are positive on the US airline sector and Delta in particular, preferring the yield pick up over Southwest Airlines in the investment grade-space despite its lower rating," CreditSights said in a research note.

The US$900m five-year priced with a 2.9% coupon to yield 2.986% or 137.5bp over Treasuries, inside initial price thoughts of 155bp area, for a new issue concession of just 0.5bp.

The US$600m 10-year, meanwhile, landed with a 3.75% coupon to yield 3.799% or 200bp over after tightening 15bp from IPTs and coming 2bp inside its existing 4.375% 2028s.

Syndicate desks were comping against Southwest Airlines' 3.45% 2027s that priced in 2017 and had been changing hands at 97bp over Treasuries.

Delta was last in the US market in March with enhanced equipment trust certificate notes, which priced with a higher cost of funding despite higher ratings.

Delta's US$75m five-year class A EETC note priced at par with a 3.404% coupon and was trading earlier this month at a yield of 2.116%, according to MarketAxess.

Meanwhile a US$425m class AA 3.204% 2024 EETC bond priced with a 3.204% coupon and was last seen trading at a yield of 2.264%.

But Monday's offering was Delta's first senior note since April 2018, when it priced a US$1.1bn two-part deal.

The previous senior notes — a 3.8% 2023 and 4.375% 2028 — each widened in the wake of the new bonds by more than 20bp each to Treasuries plus 120bp and 183bp, respectively, according to MarketAxess data.

(Reporting by William Hoffman; Editing by Paul Kilby)

((william.hoffman@thomsonreuters.com; 646 223 6141;))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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