Delta Air Lines’ $ 1.5 billion loan gives CLOs a rare find in a mixed US market

NEW YORK, April 24 (LPC) – Struggling Delta Air Lines took off in pursuit of US $ 1.5 billion from US loan investors, on Thursday launching tempting lender-friendly terms to bolster cash as the coronavirus saps corporate cash flow while thefts remain grounded.

According to data from Refinitiv LPC, Delta is the first company with a BB rating or higher to enter the US syndicated loan market since the last week of February. In doing so, it offered Collateralized Loan Obligations (CLO) a rare opportunity to purchase a syndicated loan for a company that still enjoys an investment grade from one of the three major rating agencies.

The US CLO market is the biggest buyer of new leveraged loans, but as CLO creation remains low, new leveraged deals will struggle to be widely syndicated among investors. The impact of the coronavirus has also led to a wave of downgrades of loans held by the CLOs. These vehicles can only hold a limited number of CCC rated installations, which is just a few steps above the default. Otherwise, the funds run the risk of triggering tests within the CLO that may limit returns to shareholders.

Already this month, 14 institutional term loan borrowers have defaulted on their debt, just one below the record set in 2009, according to a Fitch Ratings report released Wednesday.

Delta’s new loan is, however, rated Baa2 by Moody’s Investors Service and BBB- by S&P Global Ratings and Fitch. It offers investors not only the security of a higher credit rating, but also the security through airport slots and returns typically found in riskier B-rated transactions.

“If the CLOs have powder, they will likely make an offer given the ratings and spread offered,” said Tim Gramatovich, chief investment officer of investment advisory firm Gateway Credit Partners.

Delta’s three-year, $ 1.5 billion short loan is offered at 500bp to Libor at a discount of 97 cents on the dollar, which equates to a yield to maturity of about 7.3% , according to two bankers familiar with the terms of the deal.

In addition, if Delta seeks to take on more debt on this loan in the future, it will have to pay an additional 50bp to lenders under so-called “most-favored-nation” protection.

The airline is also required to maintain at least $ 2 billion in unrestricted liquidity over the life of the loan and has guaranteed debt against airport slots and routes Delta operates to Europe and Latin America.

“CLOs look for a combination of security, (high) ratings and coupons. Certain new issues will meet all three criteria and will be an important counterweight to certain sales of CCC, ”said Michael Herzig, managing director of investment firm First Eagle Investment Management.

Barclays arranges the loan. Lenders have until April 27 to commit to the terms offered, the sources said.

A Delta spokesperson did not respond to a request for comment, and a Barclays spokesperson declined to comment.

NOSE DIVING

In January, American Airlines, rated Ba3 by Moody’s and BB- by S&P Global Ratings, was able to modify its term loan of $ 1.2 billion from investors to a very fine margin of 175 bps against Libor and extend maturity to 2027 from 2021, Refinitiv LPC reported at the time.

Fast forward three months, however, and the higher-rated Delta is offering a significantly juicier coupon with higher ratings to gain investor support.

Delta, headquartered in Atlanta, Georgia, recorded its first quarterly loss in more than five years, according to the company’s earnings report on Wednesday.

Revenue plunged in the first three months of 2020 to US $ 8.59 billion, from US $ 10.47 billion in the first quarter of 2019, as the airline was hit by the coronavirus.

Moody’s, which ranks Delta as investment grade at Baa3 and its term loan at Baa2, said the passenger air transport industry is “most significantly” affected by the pandemic given exposure to travel restrictions, said the rating agency said in a report Thursday.

Last month, S&P Global Ratings downgraded Delta from BBB- to BB- due to lower passenger demand.

Despite headwinds, Delta’s new term loan is expected to attract strong investor demand due to the airline’s supply of collateral and significant liquidity, a third banking source said.

Delta made a concerted effort to raise funds last month.

The term loan was launched Thursday alongside a sale of US $ 1.5 billion bonds, the company’s first as a high-yield issuer, according to data from Refinitiv.

On March 20, Delta announced that it had secured a US $ 2.6 billion secured credit facility and also drawn US $ 3 billion on its revolving lines of credit, according to a press release from the company.


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