United Air taps rewards program to back $5 billion in borrowing

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United Airlines Holdings Inc. is planning to raise $5 billion by borrowing against its frequent-flyer program, stepping up efforts to boost liquidity amid the Covid-19 pandemic.

Goldman Sachs Group Inc., Barclays Plc and Morgan Stanley have committed to provide the financing and arrange syndication, United said in a statement Monday. The deal, which is expected to close by the end of July, will be secured by United’s MileagePlus customer loyalty program.

The airline, which abandoned an effort to sell $2.25 billion of junk bonds last month, is seeking additional firepower to contend with what it called “the most disruptive financial crisis in the history of aviation.” United, which also expects to have access to $4.5 billion in loans from the government’s economic rescue package, said it would have total liquidity of $17 billion by the end of September.

While the company hasn’t yet decided whether it will take the federal loan, it expects to use available slots, gates and routes as collateral if it does. Average daily cash burn will be about $40 million in the second quarter and $30 million in the third quarter, United said.

United fell 6.5% to $37.08 at 9:42 a.m. in New York as other airlines and broad stock indexes also sank amid growing concerns about new coronavirus infections.

Demand is improving in the U.S. and on some international routes after all but vanishing as the pandemic kept passengers home, United said. Customer cancellations have dropped 70% since the worst of the crisis in April. United also expects July passenger revenue to rise 50% to 100% compared with this month.

Revenue will tumble 88% in the second quarter from a year earlier, United said. Analysts expect a 90% plunge on average, according to data compiled by Bloomberg.

United is turning to its rewards program after last month’s effort to sell bonds fell flat with investors, who had concerns about the planes backing the debt. While the airline had ultimately reached a deal, it decided to pull the offering to seek more favorable terms and potentially a different structure later, Bloomberg News reported at the time.

Airlines disclose very few financial details of their loyalty programs, including their primary source of revenue -- selling miles to banks that then use them to reward customer credit card use. Joe DeNardi, a Stifel analyst, valued United’s program at $19.5 billion in an April 1 research note.

Bloomberg News
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