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United Airlines scraps $2.25bn bond on weak demand and poor terms

United Airlines has abandoned a $2.25bn bond offering after being met by weak demand from investors and high interest rates.

The US carrier, one of the largest in the country, was planning to use the proceeds from this corporate bond to refinance a $2bn term loan it took on March this year, but the deal fell through as investors demanded an interest rate of around 11%, higher than the amount it paid on the bank loan, according to sources close to the company.

Groups in the airline industry are desperate to make savings as a result of the coronavirus pandemic, which has crippled world travel.

The company planned to issue two separate notes, one due in 2023 and the other in 2025, which were going to be backed by a designated pool of 360 used aircraft. This was another element that collapsed the deal, as investors were concerned about the low market value of these assets.

The company reportedly received only $1.5bn in orders for the bond issue, less than it expected, and investors responded by raising the required interest rate to 11%, up from 9% they had pre-negotiated.

Shares of United Airlines (UAL) were losing 2.9% this morning on pre-market trading after closing the week at $25.42. The stock has lost 71% of its value so far this year as investors are still worried about the potential survival of the Chicago-based carrier to a 90% plunge in demand caused by the virus outbreak.

UAL ytd stock chart

Both United and JP Morgan, the investment bank that was promoting the issue, declined to comment on the reasons why the bond was pulled.

The airline industry is caught in a sea of troubles. Colombia’s flagship carrier Avianca filed for bankruptcy over the weekend, and last week it emerged the world’s most famous investor Warren Buffet’s sold all of his holdings in four of America’s largest carriers —  Delta Air Lines (NYSE: DAL), United Airlines (NASDAQ: UAL), American Airlines (NASDAQ: AAL) and Southwest Airlines (NASDAQ: LUV) — on worries about a downward shift in the industry’s economics caused by the health emergency.

Meanwhile, US airlines struggle to raise cash to survive the downturn caused by the outbreak. Delta Airlines, one of United’s closest rivals, is reported to be tapping the bond market with a $5bn issue, while others have been awaiting the approval of promised government-backed loans to further strengthen their balance sheets.

United Airlines currently holds around $9bn in cash and has received $5bn from the US payroll protection program to maintain its headcount as is. The company also has access to nearly $4.5bn in government-backed financing and plans to continue seeking external financing, as long as conditions are favorable.

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    Alejandro Arrieche

    Alejandro is a financial writer with 7 years of experience in financial management and financial analysis. He writes technical content about economics, finance, investments, and real estate and have also assisted financial businesses in building their digital marketing strategy. His favorite topics are value investing and financial analysis.

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