April 24, 2020 / 4:22 PM / 3 months ago

Delta Air Lines' US$1.5bn loan gives CLOs rare gem in muted US market

NEW YORK, April 24 (LPC) - Embattled Delta Air Lines took off in search of US$1.5bn from US loan investors, launching the financing with tempting lender-friendly terms on Thursday to bolster liquidity as the coronavirus saps the company's cash while flights remain grounded.

Delta is the first company with a BB or better rating to hit the US syndicated loan market since the final week of February, according to data from Refinitiv LPC. In doing so, it has provided Collateralized Loan Obligations (CLOs) with a rare opportunity to buy a syndicated loan for a company that still carries an investment grade rating from one of the three major ratings agencies.

The US CLO market is the single-largest buyer of new leveraged loans, but as CLO creation remains low, new leveraged transactions will struggle to be broadly syndicated among investors. The coronavirus' impact has also led to a wave of downgrades to loans owned by CLOs. These vehicles can only hold a limited amount of facilities rated CCC, which is just a few steps above default. Otherwise, the funds run the risk of triggering tests within the CLO that can limit returns for equity holders.

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

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

"If CLOs have some powder, they will probably provide a bid given the ratings and the spread on offer," said Tim Gramatovich, chief investment officer at investment advisory firm Gateway Credit Partners.

Delta's short three-year US$1.5bn loan is being offered at 500bp over Libor at a discount of 97 cents on the dollar, which equals a yield-to-maturity of approximately 7.3%, according to two bankers familiar with the deal terms.

Moreover, if Delta seeks any incremental debt to this loan in the future, it will have to cough up an extra 50bp to lenders in the so-called 'most favored nation' protection.

The airline must also maintain at least US$2bn in unrestricted liquidity throughout the life of the loan and has secured the debt against airport slots and routes that Delta operates to Europe and Latin America.

"CLOs are looking for a combination of security, (high) ratings and coupon. Some new issues will meet all three of these and are a great offset to some of the CCC sales," said Michael Herzig, a managing director at investment firm First Eagle Investment Management.

Barclays is arranging the loan. Lenders have until April 27 to commit to the terms on offer, the sources said.

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

NOSE DIVE

In January, peer American Airlines, rated Ba3 by Moody's and BB- by S&P Global Ratings, was able to amend its US$1.2bn term loan with investors to a razor-thin margin of 175bp over Libor and extend the 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 obtain investor support.

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

Revenues nose-dived in the first three months of 2020 to US$8.59bn from US$10.47bn in the first quarter of 2019 as the airline took a hit from coronavirus.

Moody's, which rates Delta as investment grade at Baa3 and its term loan at Baa2, said the passenger airline sector is "most significantly" affected by the pandemic given the exposure to travel restrictions, the ratings agency said in a report on Thursday.

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

Despite the headwinds, Delta's new term loan is expected to draw strong demand from investors due to the collateral package on offer and the airline's significant liquidity, according to a third banking source.

Delta has made a concerted effort to raise cash in the last month.

The term loan was launched alongside a US$1.5bn bond sale on Thursday, the company's first as a high-yield issuer, according to Refinitiv data.

On March 20, Delta said it obtained a US$2.6bn secured credit facility and also drew down US$3bn from its revolving credit lines, according to a company press release.

Reporting by Aaron Weinman. Editing by Michelle Sierra and Kristen Haunss

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