United Airlines is in the market with a private offering of notes totalling $2.25 billion to refinance a term loan, which was secured in March and backed by 360 older aircraft.
Net proceeds will repay the $2 billion 364-day revolving facility and, to the extent that any net proceeds remain, for general corporate purposes, says United.
The senior notes, which are in due 2023 and 2025, are collateralised by the same aircraft portfolio.
JP Morgan is lead left on the deal. Citi is the active bookrunner, whereas Morgan Stanley and Barclays are passive bookrunners.
According to a banker involved in the transaction, the assets are “core collateral” to the carrier and approximately 75% of the aircraft pool is made up of narrowbody units.
The offering, which has a 52% loan-to-value ratio based on recently appraised current market values, "balances flexibility for fleet management with credit protections”, the banker adds.
United’s parent company will guarantee the notes.
Fitch Ratings has assigned 'BB+'/'RR1' ratings to the proposed bond issuance. The ratings are supported by United's 'BB-' corporate rating and Fitch's recovery methodology, which assumes outstanding recovery for first-lien secured debtholders of issuers rated in the 'BB' category.
The two-notch uplift from the corporate rating is also supported by the allocation of an estimated going concern valuation in a hypothetical distressed scenario
The ratings are also supported by a "sufficient level" of overcollateralisation in the specific security package for the new issuances.
Fitch says it has reviewed appraisals provided by three aircraft appraisal firms that assess the total portfolio value at $4.3 billion, or 1.9x the total debt amount.
The ratings agency warns that there is a material risk that collateral values “could experience significant declines in the near-term” due to pressures on the commercial aircraft market, particularly since the assets included in the collateral pool are of an older vintage. United's mainline fleet as a whole has an average age of 15.5 years, but the collateral pool is five years older on average, Fitch notes.
“Older aircraft are likely to come under greater pressure in this downturn as demand drops and older planes are parked in favour of newer, more fuel-efficient models. However, in addition to the collateral value, the transaction ratings are supported by the size of the collateral pool and its importance to United.
"The 360 aircraft represent roughly 46% of United's mainline fleet. The size of the collateral pool makes it unlikely that United would choose to reject the aircraft in a bankruptcy scenario even if demand for air travel were to remain materially depressed from pre-crisis levels,” adds Fitch.
Fitch has evaluated United's capital structure pro forma for the proposed issuance, and the additional secured debt does not impair Fitch's current view of United's unsecured bonds which are rated at 'BB-'/'RR4'
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