The airline has just raised about $ 2 billion to reduce bankruptcy fears. The biggest question was whether the airline was worth around $ 12.50, not whether American Airlines would end up bankrupt.
American Airlines raised nearly $ 2 billion through a capital offering of 74.1 million shares and $ 1 billion through convertible notes. Additionally, the airline raised another $ 2.5 billion through an offer of notes in anticipation of raising $ 4.75 billion through the Loan Program portion of the CARES Act.
The airline issued the common shares at $ 13.50 for a steep discount from $ 16.00 when it began the week before the news of the planned capital increase. The capital increase of more than $ 1 billion was increased due to strong demand for an original plan of only $ 750 million.
Convertible debt comes with a 6.5% coupon with a conversion price of $ 16.20 per share. With 422 million shares outstanding, the combined offer of capital and convertible debt is diluted by up to 135 million shares. In addition, subscribers are awarded $ 150 million in additional shares and convertible debt, leading to another 20 million in dilution of shares.
For all investors concerned about rising debt, American Airlines has technically not raised any significant debt before this week. The airline started the virus panic with $ 7 billion in cash and had raised $ 1.6 billion through the loan portion of the grant. This fundraising, assuming the convertible debt turns into equity, almost makes up for all the previous debt.
The company should have nearly $ 11 billion in liquidity by the end of the quarter, and only the additional $ 4.75 billion loan from the United States Treasury actually adds substantial debt to the balance sheet. The airline would have ~ $ 16 billion in total liquidity, giving American Airlines the flexibility to withdraw less of the government loan.
American Airlines already cut daily cash consumption to $ 40 million in June and the amount doesn’t even take into account 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 cut costs on October 1.
The combination of additional funds and reduced cash burn eliminate bankruptcy fears and prepare American Airlines for the continued rebound in passenger traffic.
The key investor conclusion is that American Airlines shareholders are disappointed that the company has raised so much capital at $ 13.50 per share. The good news is that the airline no longer has the same risk of bankruptcy with the capital accumulated here and the limited boost in net debt so far during the recession.
Cowen analyst Helane Becker sees AAL as a “counter move” and believes the stock is likely to outperform as demand improves. The analyst noted: “[T]There are more opportunities in these actions here than in other airlines. We believe that Americans should be considered in a basket of stocks for investors seeking to play demand recovery. “To this end, Becker rates AAL as Best Performance (ie Buy) along with a price forecast of shares at $ 20, which is approximately 60% higher than current levels.
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