We called it first: Avolon will be up for sale next year. Domhnal Slattery has stated publically that he will attempt to sell the aircraft lessor in 2014. This is of course good news for ST Aerospace, which is behind GIC, while Oak Hill, Cinven and CVC have all been looking to bailout. But who are the likely buyers? Of course there are a few Japanese banks on the Tokyo high street that have still not followed their neighbours into aircraft leasing and that might be one option. As MUL Aviation Capital and Jackson Square fully merge under the banner of the latter, some sexiness remains to the whole leasing investment image for the Japanese. An IPO though? That will be interesting but the market is dynamic in the extreme at this time.
Pension Benefit Guaranty Corporation has achieved a record unsecured bond sale. Pension Benefit Guaranty Corporation (PBGC) received a substantial amount of senior unsecured bonds from the estate of United Airlines (it was ordered by the bankruptcy court to assume responsibility of four of the airlines pension plans in May 2005 while the airline was in bankruptcy protection), which it recently engaged Goldman Sachs to sell into the market. The total size of the bonds was close to $1bn with very elongated maturities. The size was not determined by how much they could sell but was the total amount of bonds available to sell. The three classes of bond carry maturities of 2024, 2026, and 2028. This is the largest high-yield airline debt sold to the market to date by a sub-investment grade airline and bonds with post-10 year maturities.
The bonds were already issued to PBGC and therefore already had established coupons on the securities, and so are sold at a dollar price. The $326 million Class A tranche has a maturity of 2026 (13 years) with a 6% coupon. On Friday November 8, 2013, the 2026 bond achieved a yield-to-maturity of 8.4% and a dollar price of $81.5. The $326 million Class B tranche with a maturity of 2028 (15 years) and a 6% coupon, priced at a yield-to-maturity of 8.53% and a dollar price of $79. The $326 million Class C tranche has the shortest maturity of 2024 (11 years) with an 8% coupon – this priced at $98, which was 8.28% yield-to-maturity for the 11-year bond.
The original bonds were already rated single-B by Standard & Poor’s but United Airlines assisted PBGC to secure a Moody’s rating of B2 that helped to give more comfort to investors.
Goldman Sachs was lead placement agent on the transaction. Deutsche Bank also worked on the deal.
The bank was therefore required to sell the bonds with a fixed coupon with very long maturities and also with a very unusual par-call feature, which means United Airlines has the right to redeem the bonds at par at any time. The bank was also unable to issue the usual offering memorandum document and was forced to sell the bonds into the market using the original indenture that was filed with the SEC when the bonds were given to PBGC. The marketing information was sent out to investors by 3:30pm on Thursday November 7, 2013, and the deal priced and allocated oversubscribed on Friday, November 8.
Selling 11 years-plus of senior unsecured airline risk is extremely difficult, if not impossible in the past. United Airlines has already broke the mould in this respect since it has already issued a seven-year bond, which was considered miraculous at the time because traditional wisdom states that due to the cyclical nature of the airline industry it is extremely difficult to sell bonds with a maturity longer than a five years. Although Southwest and FedEx have both issued 10-year bonds in the past, there has certainly been no high-yield issuance of this length in this sector and not by any sub-investment grade airline. Moreover, 15-16 year debt it is very similar to 20-year debt, where senior unsecured debt presents a quasi-equity feature on balance sheets.
This deal shows that the industry feels a new wave of stability in the sector. Although credit should go to the fact that United succeeded in launching its seven-year bond, the increased confidence in the US airline market has been boosted by the investor opinion that the American Airlines-US Airways merger is going to happen and it will serve to make the US airline market an even more stable sector than in the past. There have also been very strong recent US airline results.
This bond sale is a first for the airline industry and has broken a number of records. With such long maturities, it would have seemed like a very difficult sell; however the deal was oversubscribed with a good spread of investors across all tranches. This deal, more than any other this year, demonstrates just how strong the capital markets are at the moment and also reflects investors' search for yield in a compressed interest rate environment.