United plans $ 5 billion loan against MileagePlus – PaxEx.Aero

Take a look at the new United Airlines livery with a completely blue globe on the stern

United Airlines will secure $ 5 billion in additional funding by taking out a loan for the MileagePlus loyalty program. The company announced the plans on Monday morning as part of an update to its liquidity position. With the loan and other funds under the CARES Act, the company expects liquidity of around $ 17 billion by September 2020.

Goldman Sachs Lending Partners LLC, Barclays Bank PLC, and Morgan Stanley Senior Funding, Inc. have committed to provide MileagePlus funding through a term loan facility and arrange for its syndication to set precedent until the end of July 2020. Goldman Sachs Lending Partners LLC will act as sole proprietorship Structuring agent and lead left arranger act for the transaction.

No program changes

The loan does not change the operational or decision-making processes within the MileagePlus program, leaving United in full control throughout the term of the contract. It also makes up only about 25% of the estimated value of the MileagePlus program. With more than 100 million members and significant marketing insights about those members, you have the opportunity to Further commercialize the data surrounding these members is a big draw for the program.

The company’s continuing to sell large amounts of Points to partners and direct control of the redemption prices for those points helps ensure that the program generates “substantial and stable revenue and free cash flows” for the parent company.

More than just the loyalty program

The credit news came as part of a broader liquidity announcement. United burns $ 40 million a day in the second quarter (about $ 2 billion for the quarter). The company expects that number to drop to $ 30 million a day in the third quarter. With the $ 5 billion loan from MileagePlus and another $ 4.5 billion loan from the CARES Act, the airline expects liquidity in the order of $ 17 billion by September.

However, the CARES Act loan also requires collateral from the airline. This has led many analysts to question whether the loyalty programs need to be reserved for this use. By taking out a commercial loan for the program, United is advising that it is unlikely to use MileagePlus as collateral. Instead, she expects “slots, gates and routes” to be enough to meet demand from the US Treasury Department. It remains to be seen whether other freight forwarders can deliver similarly.

American Airlines recently reviewed its AAdvantage program under the CARES Act program and came back with a valuation of $ 19.5 billion to $ 31.5 billion. American expects that “a significant portion … will be mortgaged as collateral to support the CARES Act loans“. American also has billions of equity in slots, gates, and routes. But most of it, 4.2 billion

Long-term debt risks for the industry

Airlines need this increased debt to weather the current downturn with billions in quarterly losses. But the increased debt burden creates longer-term cash flow and profitability challenges. IATA Chief Economist Brian Pearce noted last week that converting debt into equity could provide a smoother way for some airlines to shift that burden: “Airlines need to get rid of some of this debt. And the stock markets have strengthened remarkably. Perhaps now is the time for airlines to try to increase that equity. “

Of course, United has already taken this route, selling $ 1 billion worth of shares in late April. Today’s conversion of more debt into equity is unlikely to be well received by the markets.

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