Delta aims for high grade balance sheet; pays back $3 billion of debt

By Devika Patel

Knoxville, Tenn., Oct. 13 – Delta Air Lines, Inc. management is focused on getting the company cash-flow positive, which it expects to do by spring of 2021, and will then turn its focus to debt paydown with the goal of attaining an investment-grade balance sheet.

The company has already started paying down debt, repaying $3 billion of bank debt that was due next March.

“The challenges of this year have reinforced our belief in the importance of an investment-grade balance sheet, and our top financial priority will be to regain that as soon as possible,” chief executive officer Ed Bastian said on the company’s quarter ended Sept. 30 earnings conference call on Tuesday.

“The first step in that process is getting back to break-even cash flow.

“We had initially hoped to be there by the end of this year, but as the virus has had greater impact on our business than expected, that goal has shifted a few months.

“We expect to average a daily cash burn rate of $10 million per day in the December month, with good line of sight to positive cash flow by the spring.

“Once we achieve that milestone, we’ll have a heightened focus on paying down debt,” Bastian said.

The company has already begun paying down debt.

“With our cash burn trajectory on track to achieve break-even by spring, and a solid liquidity position, our balance sheet work has already begun,” executive vice president and chief financial officer Paul Jacobson said on the call.

“Last week, we repaid the $3 billion outstanding under our 364-day term loan due in March of next year.

“We also paid down $2.6 billion we had drawn on our revolvers earlier in the year and that capacity remains available in the future.

“We have now flattened our near-term debt maturities, with $2.3 billion of obligations due through the end of 2021,” Jacobson said.

The debt repayments come on the heels of a huge debt offering last quarter.

In September, Delta completed the largest debt offering in aviation history, raising $9 billion at a blended average rate of 4.75% secured by its SkyMiles loyalty program.

“During the quarter, we raised $9 billion backed by the cash flows and IP of our SkyMiles program,” Jacobson said.

“The financing was nearly six times oversubscribed and priced at a blended rate of 4.75%, an amazing outcome for the largest debt offering ever by an airline,” Jacobson said.

The company ended the quarter with $21.6 billion of liquidity and $17 billion of adjusted net debt, up $6.5 billion since Dec. 31, 2019.

On Sept. 16, Delta and SkyMiles IP Ltd. priced an upsized Delta SkyMiles $6 billion two-part senior secured bullet notes transaction (Baa1//BBB).

The deal, on which the high-yield and investment-grade bond syndicates combined forces, was upsized from $4 billion and was heard to be playing to a staggering $30 billion of orders, a trader said at the time.

The issuance included an upsized $2.5 billion tranche of five-year notes that priced at par to yield 4½%, at the tight end of the 4½% to 4 5/8% revised talk. Earlier official talk was in the 4¾% area. Initial guidance was in the 5% area. The tranche size increased from $2 billion.

The bond deal also featured an upsized $3.5 billion tranche of eight-year notes that priced at par to yield 4¾%. The yield printed at the tight end of the 4¾% to 4 7/8% yield talk, revised from earlier talk in the 5% area. Initial guidance was in the 5 3/8% area. The eight-year notes tranche was also upsized from $2 billion.

The 4½% notes due 2025 traded to 101¾ bid, 102¼ offered, and the notes due 2028 traded to 102 bid, 102½ offered.

The deal's timeline was foreshortened. It had previously been expected to remain in the market until Thursday.

Goldman Sachs & Co. LLC was the left lead bookrunner. Joint lead bookrunners were Barclays, J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC.

Joint bookrunners were BofA Securities Inc., BBVA Securities Inc., BNP Paribas Securities Corp., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Fifth Third Securities Inc., PNC Capital Markets LLC, SMBC Nikko Securities America Inc., Standard Chartered Bank, U.S. Bancorp Investments Inc. and Wells Fargo Securities LLC.

Features of the credit agreement include a collection account into which SkyMiles and its subsidiaries will be required to deposit all revenues pledged to secure the notes on a first-priority basis, subject to a simplified waterfall provision.

The agreement specified a reserve account equivalent to three months of interest service, to be funded up front.

The parent is required to maintain minimum liquidity of at least $2 billion.

Along with the upsizing of bond tranches, a concurrent term loan was upsized to $3 billion from $2.5 billion, raising the overall size of the debt being placed – two tranches of notes and the loan – to $9 billion from $6.5 billion.

In a document change which came in conjunction with that upsizing, the priority lien cap increased to $9 billion from $8.5 billion.

Proceeds were earmarked to fund the reserve accounts and for SkyMiles IP to make a distribution to SkyMiles IP Finance, which will in turn make a distribution to SkyMiles IP Holdings, which will in turn make an intercompany loan to Delta, which intends to use the proceeds for general corporate purposes and to support its liquidity position.

Delta is a commercial airline based in Atlanta.

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