American Airlines Group Inc. is tapping all corners of the capital markets to raise at least US$3.5 billion of cash in the latest test of investor willingness to finance travel companies still under strain from the coronavirus pandemic.

The company is marketing a US$1.5 billion secured junk bond maturing in 2025 with early pricing discussions for a yield of about 12 per cent, according to people with knowledge of the matter. The company was sounding out some investors last week for a similar structure at a yield of 11 per cent, Bloomberg News previously reported.

As the most debt-laden of the largest U.S. airlines, American is having to pay up. The yield on the bond is more akin to that of riskier CCC debt currently trading around 11.65 per cent, even though the offering is expected to have at least two ratings in the double B ratings tier, the highest in the junk market.

American is also marketing a US$500 million four-year loan at a spread of 9.5 percentage points over the London interbank offered rate and at a discounted price between 95 cents to 96 cents on the dollar, said the people, who asked not to be named discussing a private transaction.

That comes to an all-in yield around 11 per cent, based on Bloomberg calculations.

Representatives for Citigroup Inc., which is leading both financings, and American declined to comment.

The debt will be secured by slots, gates and routes across the world in the United States, Latin America, Asia, and Europe, and comes as the carrier diverges from its recent reliance on federal aid as the coronavirus pandemic suppresses travel demand.

It’s part of a larger US$3.5 billion financing that also includes US$750 million of new shares, which are expected to trade on Tuesday, and US$750 million of senior convertible notes due in 2025 that are offered with an initial coupon range of 6.0 per cent to 6.5 per cent, according to other people familiar with the matter. The conversion premium is offered at 17.5 per cent to 22.5 per cent.

The company’s shares dropped 6.6 per cent to US$14.94 at 2:32 p.m. in New York, the biggest decline on the S&P index of major U.S. airlines.

Steep Cost

American is offering steeper yields than some of its rivals. Delta Air Lines Inc. sold a US$3.5 billion secured bond in April at a yield of 7 per cent, and followed that with a US$1.25 billion unsecured deal in June that offered a yield of 7.375 per cent.

The junk bond may be sold as soon as Wednesday, with commitments for the loan due the same day. Calls with loan and bond investors began earlier on Monday. Proceeds will refinance a US$1 billion 364-day term loan the company raised from banks in March, with the remaining used to enhance the company’s liquidity, according to a news release.

Other sweeteners have been included. The junk bond, which cannot be repaid for the life of the deal, includes a rare provision that protects investors if the valuation of assets pledged as collateral falls.

Investors will closely examine the collateral package on American’s bonds, according to market watchers. United Airlines Holdings Inc. last month scrapped a US$2.25 billion bond deal that was secured on a pool of aging jets after investors pushed back on the collateral and the company wasn’t satisfied with the final terms.

United is now preparing a new US$5 billion debt sale secured against its frequent-flyer program.

After the transaction, American will still have about US$3 billion to US$4 billion of unencumbered assets, excluding those in the AAdvantage miles reward program, according to deal documents. The company is expected to reach a daily cash burn of US$40 million in June, down from US$100 million in April.

American will be joining both Delta and JetBlue Airways Corp by tapping the leveraged loan market to boost liquidity.

Delta raised a US$1.5 billion loan in April at 4.75 percentage points more than Libor with a discounted price of 97 cents on the dollar.

JetBlue raised US$750 million from a loan earlier this month at 5.25 percentage points over Libor and also with a 97 cent discounted price.

Southwest Airlines Co, which is rated investment grade, also recently raised about US$4 billion of bonds total in deals in April and June.

--With assistance from Gowri Gurumurthy, Lara Wieczezynski, Davide Scigliuzzo, Mary Schlangenstein, Crystal Kim, Drew Singer, Gillian Tan and Lisa Lee.