Delta Air Lines’ $ 1.5 billion loan gives CLOs a rare gem in the subdued US market


NEW YORK, Apr. 24 (LPC) – The embattled Delta Air Lines took off in search of $ 1.5 billion grounded.

According to data from Refinitiv LPC, Delta is the first company with a BB rating or better to enter the US syndicated loan market since the last week of February. It thus offers Collateralized Loan Obligations (CLOs) the rare opportunity to buy a syndicated loan for a company that still has an investment grade rating from one of the three major rating agencies.

The US CLO market is the largest single buyer of new leveraged loans, but with CLO education still low it will be difficult for new leveraged transactions to find broad syndication among investors. The effects of the coronavirus have also resulted in a wave of downgrades to loans owned by CLOs. These vehicles can only accommodate a limited number of CCC rated facilities, which is just a few steps above the standard. Otherwise, the funds run the risk of triggering tests within the CLO that can limit returns for shareholders.

As early as this month, 14 institutional borrowers on fixed-term loans defaulted on their debts, just one smaller than the 2009 record, according to a Fitch Ratings report on Wednesday.

However, Delta’s new loan is rated Baa2 by Moody’s Investors Service and BBB- by S&P Global Ratings and Fitch. It not only offers investors the security of a higher credit rating, but also security through slots at the airport and returns that are normally found in riskier individual B-rated transactions.

“If CLOs have some powder, given the ratings and the spread on offer, they will likely bid,” said Tim Gramatovich, chief investment officer at investment advisory firm Gateway Credit Partners.

Delta’s short three-year loan of $ 1.5 billion is being offered at 500 basis points above Libor at a discount of 97 cents to the dollar, which translates into a yield to maturity of about 7.3%, according to two bankers familiar with the terms are familiar.

If Delta seeks additional debt for this loan in the future, it will also have to pay an additional 50 basis points to the lenders under what is known as most favored nation protection.

The airline is also required to hold at least $ 2 billion in unrestricted liquidity over the life of the loan and has hedged the debt against airport slots and routes that Delta operates to Europe and Latin America.

“CLOs are looking for a combination of security, (high) ratings and coupons. Some new issues do justice to all three and are a great offset to some of the CCC sales, ”said Michael Herzig, managing director of investment firm First Eagle Investment Management.

Barclays arranged the loan. Lenders have until April 27 to abide by the terms on offer, the sources said.

A Delta spokesman did not respond to a request for comment and a Barclays spokesman declined to comment.


In January, the peer American Airlines, which was rated Ba3 by Moody’s and BB- by S&P Global Ratings, was able to secure its term loan of 1.2 billion Refinitiv LPC reported at the time.

However, three months later, the higher-rated Delta is offering a significantly juicier coupon with higher ratings to get investor support.

Delta, headquartered in Atlanta, Georgia, posted its first quarterly loss in more than five years, according to the company’s earnings report on Wednesday.

Revenue declined from $ 10.47 billion in the first quarter of 2019 to $ 8.59 billion in the first three months of 2020 when the airline was hit by the coronavirus.

Moody’s, which rates Delta investment grade at Baa3 and its term loan at Baa2, said the passenger airline sector has been “hardest hit” by the pandemic amid travel restrictions, the rating agency said in a report on Thursday.

Last month, S&P Global Ratings downgraded Delta from BBB- to BB due to the decline in passenger demand.

Despite the headwind, Delta’s new term loan is expected to attract strong investor demand due to the collateral package on offer and the airline’s significant liquidity, according to a third bank source.

Delta has made a concerted effort to raise cash over the past month.

The term loan was signed on Thursday along with a $ 1.5 billion bond sale.

On March 20, Delta announced it had received a $ 2.6 billion secured credit facility and had drawn $ 3 billion on its revolving credit facilities, according to a company news release.


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