Southwest Airlines has priced a new offering of 70 million shares of common stock at $28.50 per share – upsized from 55 million – and $2bn of convertible, five-year senior notes, at 1.250%, which was upsized from $1bn.
The gross proceeds of both the common stock offering and the convertible notes offering provide Southwest with an expected cash cushion of approximately $4.0bn.
Southwest has also granted the underwriters a 30-day option to purchase up to 10,500,000 additional shares of common stock at the public offering price and a 30-day option to purchase up to $300 million of additional convertible notes.
The notes will be convertible by holders if certain conditions are met, based on an initial conversion rate of 25.9909 shares of common stock per $1,000 principal amount of the notes, which is equivalent to a conversion price of approximately $38.48 per share, representing a premium of 35% above the offering price per share. Southwest will settle conversions of the notes in cash, shares of common stock, or a combination.
Joint bookrunners for the common stock offering and the convertible notes offering are Morgan Stanley, BofA Securities, JPMorgan, BNP Paribas and Citigroup. Senior co-managers are Goldman Sachs and Wells Fargo, with co-managers Academy Securities, Bancroft Capital, Comerica Securities, Evercore, Loop Capital Markets, Raymond James and Siebert Williams Shank.
Morgan Stanley, BofA Securities, and JP Morgan are acting as representatives of the underwriters of the offerings.
In its first quarter report, Southwest noted a net loss of $94 million and $.18 net loss per diluted share, with first quarter operating revenues down 17.8% to $4.2bn.
In April 2020, Southwest reached an agreement in principle with the US Treasury for proceeds of approximately $3.3bn under the Payroll Support Program (PSP) as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act); consists of $2.3 billion in direct payroll support and $948 million in the form of an unsecured 10-year term loan. Southwest is also expected to issue warrants that enable the US Treasury to purchase up to an aggregate of approximately 2.6 million shares of the company's common stock.
Since the beginning of 2020, bolstered cash on hand by $6.8 billion as of April 24, 2020, including $1.6 billion of PSP proceeds, or 50 percent; remaining $1.6 billion of PSP proceeds expected to be received by July 2020.
Gary C. Kelly, Chairman of the Board and Chief Executive Officer, stated that the airline has taken “swift action to significantly reduce cash burn” by reducing executive salaries by 20%; suspended all hiring and non-contract salary increases; implemented voluntary time-off programs; cancelled or deferred hundreds of capital spending projects; modified vendor and supplier payment terms; and cut all non-essential spending, resulting in a $2bn reduction in annual 2020 operating costs as well as more than $1 billion in reduced annual 2020 capital spending.
Since the beginning of 2020, Southwest has now raised approximately $6.8 billion through $5.2 billion in debt financings and $1.6 billion in proceeds received from the PSP, so far. As of April 24, 2020, the airline has cash and short-term investments of $9.3 billion, with leverage of 47%. It still has unencumbered assets worth nearly $8 billion, including more than $6 billion in aircraft.
Southwest also announced changes to its fleet and that it was revising its orderbook and delivery schedule with Boeing. Southwest currently has a fleet of 742 aircraft, with 350 aircraft in long-term storage or temporary parking. Of these, 140 aircraft, including the 34 737 MAX aircraft that were grounded on March 13, 2019, are in long-term storage; while 250 737NGs are in short-term parking programs that rotate in and out of active flying. Southwest has agreed with Boeing to take delivery of no more than 48 aircraft through December 31, 2021. It is currently planning to take delivery of less than the 27 MAX aircraft previously expected from Boeing in 2020, and says that it is “evaluating the need to temporarily remove or retire additional aircraft from its fleet”.