American Airlines/high yield: music plays on for junk bonds

The junk bond party has yet to fade. For proof, look no further than American Airlines’ jumbo bond sale which hit the dance floor last week. The Texas-based airline issued $6.5bn worth of speculative-grade debt. Total US corporate junk bond sales have hit $113bn so far this year. That is a rockin’ start following a perky 2020.

American’s two-tranche offering received an impressive $30bn in orders. The five- and eight-year notes yielded 5.5 per cent and 5.75 per cent, respectively, under initial guidance well over 6 per cent. Last June, the airline had to fork out 11.75 per cent for $2.5bn of junk debt. 

The robust demand underscores how high-yield debt issuance has managed to keep its good rhythm despite the trend in so-called reflation trades. The yield of the ICE BofA High Yield index has gone from more than 11 per cent last March to below 4 per cent in February 2021 for the first time ever, a big spread squeeze relative to US Treasuries.

Investors bet on junk bonds on the expectation of better earnings growth reducing the risk of debt default. Even with the sharp increases of the past few weeks, Treasury yields remain low and well below historic levels. Junk bonds with their comparatively shorter maturities and higher yields, look attractive. 

In the case of American, it has backed its jumbo bond with its loyalty programme (worth up to $30bn) as collateral.

American plans to use the bond proceeds to repay its government loans. Even so, it remains heavily indebted and continues to burn $30m a day in the first quarter. The company ended 2020 with a total debt balance (including lease obligations) of $41bn. Net of cash that is more than eight times its projected ebitda for 2022, on S&P Global data. 

Equity investors — specifically day traders who use Reddit to tout and bid up down-on-heel stocks — have also turned up the dance music volume. American recently found itself in the midst of a buying frenzy. With the cocktail of this speculation, ample cheap liquidity and the extension of more government aid, American’s junk bonds are an unlikely success.

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