Via Financial Times

Almost a week after America’s largest airlines reached a bailout deal with the US Treasury, further details have emerged of the low interest rates the carriers will pay for taxpayer funding aimed at seeing them through the coronavirus pandemic.

Chicago-based United Airlines said on Monday it would pay a rate of 1 per cent in interest on $1.5bn of funding for the next five years, after which the terms will reset to a rate tied to market interest rates.

United said the terms for its loans matched what the government had offered to other carriers receiving funds as part of a $50bn aid package. The Treasury has also agreed to give large grants to airlines to help cover payroll costs.

The loan portions of the bailout have to be repaid within 10 years and the Treasury will also receive warrants to buy shares in return for the funds, giving the US taxpayer exposure to any share price recovery across the industry.

The cheapest debt available to airlines before the coronavirus pandemic required aircraft as collateral and interest rates of 2-3 per cent, said Philip Baggaley, credit analyst at S&P Global Ratings. Unsecured debt commanded interest rates of between 4 per cent and 6 per cent.


the money earmarked by the US stimulus package for airlines

The government’s interest rate offer was “definitely very good, especially considering it’s unsecured”, said Mr Baggaley. 

The loan is structured to encourage speedier repayment: after five years, the rate will be pegged to a floating market interest rate called the secured overnight financing rate, plus 2 per cent.

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The $50bn earmarked for airlines in last month’s $2tn US stimulus package is divided into two $25bn pots, the first of which carriers must use to keep staff on the payroll despite the widespread grounding of aircraft. That money is composed of approximately 70 per cent in grants and 30 per cent in loans with the 1 per cent rate.

The second pot comprises entirely loans, but the interest rate for those is yet to be determined. Delta Air Lines and American, Southwest and Alaska Airlines have all said they plan to take money from that second portion. Southwest and Alaska declined to comment. Delta and American did not return a message seeking comment.

United is taking $5bn from the first pot, including its $1.5bn in loans. The US government will receive warrants — the right to buy shares at a pre-determined price — equal to 1.9 per cent of the company. If United taps another $4.5bn in loans from the second tranche, taxpayers’ stake in the airline would rise to 7.6 per cent.

Vertical Research Partners analyst Darryl Genovesi said in a note that United would be reluctant to take the additional loans because of the attached warrants.

“We don’t know what interest rate Uncle Sam would expect United to pay, but [the stimulus package] stipulates that it be consistent with its pre-Covid cost of debt, so something in the 3-4 per cent range would make sense,” he wrote.

United recorded a $2.1bn pre-tax loss in the first three months of 2020 as revenue plummeted 17 per cent from the same period a year earlier to $8bn. That included $1bn in impairment charges on a loan to Colombian airline Avianca, its equity stake in Brazilian airline Azul and the value of its China routes, many of which stopped operating when the pandemic began.

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While the bad results were expected, Mr Baggaley said, the numbers “showed just how much it fell off a cliff, and if it did that mostly on the back of three weeks of bad results, imagine how bad [the] second quarter is going to be”.