Airlines have tapped some of the banking world's sharpest minds to stay airborne since the novel coronavirus slashed demand for travel.
Carriers have borrowed techniques from parts of Wall Street's most esoteric financing structures to entice investors into deals that might otherwise have seemed too risky for an industry upended by the pandemic.
Two top bankers at Barclays helped the country's carriers raise over $11 billion across eight transactions in the last year, and in the process, have cemented the British bank's leadership in this corner of the debt markets. The bank also had a hand in arranging roughly $12 billion in additional debt for airlines alongside rival banks on Wall Street.
The latest deal saw Ben Metzger, Barclays' head of global transportation, and Ben Burton, the bank's head of US leveraged finance syndicate, help American Airlines complete one of the largest-ever transactions for an airline in the bond and loan capital markets. Barclays led a $3.5 billion loan, while Goldman Sachs led a $6.5 billion bond for the airline, Insider reported on March 11.
Barclays' work with American follows a $1.2 billion bond deal it led for Hawaiian Airlines in January and transactions for Spirit and Delta Air Lines in 2020.
Investors may have balked at increasing their exposure to more airline debt amid a pandemic, but these latest transactions leveraged carriers' profitable frequent flyer schemes. They've also been packaged to ring-fence revenues from loyalty programs to ensure that investors are repaid from a special purpose vehicle that is bankruptcy-remote.
"We've enabled these airlines to raise capital during the darkest days of the pandemic and do it in a much larger size than ever before," Burton told Insider.
Indeed, US airlines raised roughly $20 billion in high-yield bonds and almost $22 billion in leveraged loans last year, up from just $7.2 billion in high-yield bonds and $3.8 billion in loans in 2019, according to data from Refinitiv.
"The first thing airlines did was contact their banks," said Metzger. "First it was for bank-provided liquidity facilities secured by aircrafts, and then airlines accessed capital markets for additional funds using different collateral."
Barclays compiled transactions for JetBlue, Allegiant Air and finalized a loan for Delta backed by airport slots, gates, and routes, last year.
"Airlines have different pockets of valuable collateral, whether that's aircrafts, slots, gates, and routes, all of which have been tested over time," said Metzger. "But the concept of loyalty businesses present enormous value."
Airlines' crown jewels
Long considered the crown jewels of airlines, frequent flyer schemes are stacked with value. They generate cash through third-parties, such as credit cards, that are less-impacted by the swings in demand for passenger travel.
And carriers have dangled their loyalty programs to investors in exchange for much-needed cash.
Brazil's Gol, for example, raised $565 million through an initial public offering of its Smiles program in 2013. Colombia's Avianca pocketed $343.7 million when it sold a 30% stake in its LifeMiles program to private equity shop Advent International in 2015.
Last October, however, Avianca u-turned, buying back almost 20% of what it sold for $195 million.
"Loyalty businesses, most notably in Latin America, have been spun off," Metzger told Insider. "But [US airlines] felt these businesses were too valuable to sell."
United, unwilling to offload a piece of MileagePlus, instead raised $6.8 billion against the program last June. It was the first US carrier during the pandemic to use its loyalty scheme to tap the capital markets.
It was the natural candidate for this untried financing.
More than 10 years ago, the airline had contemplated selling a portion of MileagePlus, according to Metzger. While the sale never materialized, the program had been carved out into a subsidiary, an important factor in ensuring these new financings are bankruptcy-remote.
Goldman Sachs, Barclays, and Morgan Stanley concocted the recipe for United that's since provided crucial liquidity for American, Hawaiian, Delta, and Spirit.
"As with anything new, no one knew whether investors would understand the structure," said Burton. "It was structured similar to asset-backed securities [ABS] frequently sold to ABS investors. High-yield [bond] and leveraged loan investors loved the enhanced structural features the deals provided."
Hopeful for takeoff
Now that the US' largest carriers have tapped into loyalty programs for secured debt, Burton reckons airlines can turn to other, sometimes riskier methods of capital raising, such as unsecured bonds.
While investors would enjoy a higher rate of return on unsecured debt, they risk not being repaid, or being repaid less than their investment, if the airline is under duress.
Despite an uptick in vaccinations, airlines and their investors will need to be patient before travel demand picks up to pre-pandemic levels.
"If the economy continues to re-open, airlines should have access to unsecured capital for liquidity purposes, said Burton. "If not, that might require airlines to find other unencumbered assets outside of their loyalty programs to use to raise capital."
The cyclical nature of the airline industry does unearth some painful memories for investors that have incurred losses. And while this pandemic-induced borrowing binge has provided airlines with urgent liquidity, investors' increased exposure to the sector comes as it remains entrenched in the early stages of a recovery.
"Airlines were a small part of the high-yield bond index, but the aggregate amount of airline paper has increased massively," said Burton. "Going forward, you can run into capacity constraints."
