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American Airlines: Equity Raise Reduces Bankruptcy Fears

The biggest worry surrounding American Airlines Group (AAL) was the large debt load and whether the company could get back to cash flow positive quick enough to repay debt. For this reason, a lot of people have speculated on whether the weaker airline would go bankrupt.

The airline just raised about $2 billion reducing the bankruptcy fears. The bigger question all along was whether the airline had value here around $12.50, not whether American Airlines was ever going to end up bankrupt.

Equity Raise

American Airlines raised nearly $2 billion via an equity offering of 74.1 million shares and $1 billion via convertible notes. In addition, the airline raised another $2.5 billion via a notes offering in anticipation of raising $4.75 billion via the Loan Program portion of the CARES Act.

The airline issued the common shares at $13.50 for a steep discount from the $16.00 when the week started before the news of the planned equity raise. The equity raise of over $1 billion was upsized due to strong demand from an original plan of only $750 million.

The convertible debt comes with a 6.5% coupon with a conversion price of $16.20 per share. With 422 million shares outstanding, the combined equity and convertible debt offering is dilutive by up to 135 million shares. In addition, the underwriters are granted $150 million in additional shares and convertible debt leading to another 20 million in share dilution.

Cutting Debt

For all of the investors worried about mounting debt, American Airlines has technically not raised any meaningful debt prior to this week. The airline started the virus panic with $7 billion in cash and had raised $1.6 billion via the loan portion of the grant. This fundraising, assuming the convertible debt is converted into equity, nearly offsets all of the previous debt.

The company should have nearly $11 billion in liquidity ending the quarter and only the additional $4.75 billion loan from the U.S. Treasury actually adds substantial debt to the balance sheet. The airline would have ~$16 billion in total liquidity giving American Airlines the flexibility to draw down less of the government loan.  

American Airlines has already cut daily cash burn to $40 million in June and the amount doesn’t even factor in the Payroll Support Program grant funds of ~$27 million per day. These funds require the company to keep payroll costs high, but the airline will be able to reduce costs on October 1.

The combination of the additional funds and the reduced cash burn eliminate the bankruptcy fears and set American Airlines up for the continued rebound in passenger traffic.

Takeaway

The key investor takeaway is that shareholders of American Airlines are disappointed the company raised so much equity at $13.50 per share. The upside is that the airline no longer has the same bankruptcy risk with the equity raised here and the limited boost in net debt so far during the downturn.

Cowen analyst Helane Becker views AAL as a “contrarian play” and believes the stock is likely to outperform as demand improve. The analyst noted, “[T]here is more opportunity in these shares than in some other airlines. We believe American should be considered in a basket of stocks for investors looking to play the recovery in demand.” To this end, Becker rates AAL an Outperform (i.e. Buy) along with a $20 stock-price forecast, which implies about 60% upside from current levels.

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Disclosure: No position.

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