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Delta pledges SkyMiles business to secure US$9bn debt raise

Credit: REUTERS/ELIJAH NOUVELAGE

Delta Air Lines drew a massive crowd for a US$9bn package of bonds and loans secured against its SkyMiles loyalty programme last week, adding to the company's growing safety net of liquidity.

By David Bell and Aaron Weinman

NEW YORK, Sept 17 (IFR) - Delta Air Lines drew a massive crowd for a US$9bn package of bonds and loans secured against its SkyMiles loyalty programme last week, adding to the company's growing safety net of liquidity.

The deal drew US$35bn of demand across US$6bn in secured bonds and a US$3bn secured loan, according to a source close to the deal, helping joint bookrunners Barclays,Goldman Sachs, JP Morgan and Morgan Stanley upsize the overall deal from an initial US$6.5bn. Goldman was left lead on the bonds; Barclays was left lead on the loan.

Delta became the latest airline – after United and Spirit – to use its valuable rewards programme to raise liquidity as it continues to burn cash in a depressed travel market.

Airlines have pledged assets such as landing gates and slots as well as intellectual property to secure bond offerings since March, but deals backed by rewards programmes have seen particularly strong interest because the revenues from these platforms are not fully correlated with demand for travel.

About 75% of the US$6.1bn of cash sales that were generated by SkyMiles in 2019 came from third parties such as Amex, which buy airmiles from the company to offer as incentives to consumers.

While air traffic plunged in the first half of 2020, cash received from SkyMiles sales to American Express declined by less than 5% year-on-year to US$1.9bn as consumers used co-branded cards, according to Delta.

"It's not 100% correlated," said the source close to the deal. "While air traffic dropped in May and June and is starting to come back, consumer spending has come back a lot."

RING-FENCED

The structure of the deal also gave investors added comfort.

Like United's MileagePlus-backed bond and loan transaction, Delta used a securitisation structure that ring-fenced SkyMiles' revenues in a special purpose vehicle designed to be bankruptcy-remote.

"It's very creative financing in the way they've set up the ring-fencing and we think it's attractive," said Steve Kellner, head of corporate bonds at PGIM Fixed Income.

"Generally, we're pretty comfortable [with this structure] and the way it can potentially trap cashflows if the airline were to get into trouble."

The structure helped the secured bonds and loans obtain Baa1/BBB/BBB ratings, higher than Delta's Baa3/BB unsecured ratings.

This led to investment grade, high-yield and structured finance investors competing for bond allocations. Higher credit ratings also proved a masterstroke for the loan portion of the financing as CLOs jumped at the chance to participate in an investment-grade loan that will improve the credit quality of their overall loan portfolios.

A US$2.5bn of 2025 bullet notes landed at 4.50%, inside initial price talk of 4.75% area.

The US$3.5bn of 2028 bullet notes were priced at 4.75%, inside price talk of 5.00% area.

The US$3bn seven-year secured loan was priced at 375bp over Libor, tighter than guidance of 425bp–450bp, while the original issue discount was tweaked to 99 cents on the dollar from 98.5 cents.

"There's still not a lot of new money in the loan market, so this is a chance for Delta to snatch up the liquidity available from investors," said Michael Marzouk, managing director for bank loan strategies at Pacific Asset Management, before the deal was priced. "And with investment grade ratings, CLOs will gobble this up."

Leads made the bonds even more attractive to investment-grade buyers by offering them as non-call for life structures. The loan is non-callable for three years, callable at 104 in year four, 102 in year five and at par thereafter.

The margin on the loan was slightly more expensive but, unlike the bonds, is easy for Delta to refinance in the future, providing flexibility.

In both cases investors saw the pricing as attractive given the ratings.

The five-year and eight-year bonds were priced at spreads of 423bp and 422bp over Treasuries. That is in stark contrast to spreads on average Double B bonds of 366bp and average Triple B bonds of 174bp, according to ICE BofA data.

Meanwhile, the 375bp spread over Libor on the loan compares with the average drawn Double B spread of 340bp this month and the average drawn Triple B spread of 123bp, according to Refinitiv LPC data.

LIQUIDITY BOOST

Bankers were ultimately able to make raising finance against the SkyMiles business in the capital markets a more attractive option for Delta than going to the US government for funding.

Delta said on Monday that it had opted against taking a US$4.6bn secured loan from the US Treasury under the CARES Act.

"From the beginning the idea was to try to get the maximum value out of the frequent flier programme," said the source close to the deal. "The problem with the government loan was that it provided too low an advance rate against what is an important asset."

The financing adds to the US$15.7bn cash and revolver capacity position Delta reported at the end of the second quarter.

Delta said on July 14 that it had reduced its average daily cash burn by 70% since late March – to US$27m – and hopes to achieve breakeven cash burn by the end of the year.

"Even if they burn US$27m a day, that's two and a half years of liquidity runway even if you assume no demand improvement," said a bond investor. "It's a pretty strong liquidity position that is backing up these bonds."

Delta has maxed out the first-lien debt capacity of the SkyMiles business at US$9bn, but could issue more debt if the business grows and as the debt amortises.

Other airlines are expected to join Delta, United and Spirit in leveraging their rewards programmes, and companies outside of the airline industry such as the auto and hospitality companies may also see benefits in this kind of fundraising.

"Consumer behaviour and the data associated with that is really valuable for corporates to think about and analyse, and to find these veins where there's a different cashflow from the underlying cashflows of the company," said the source close to the deal.

(This story will appear in the September 19 issue of IFR Magazine.)

((david.bell@thomsonreuters.com;))

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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