Alaska Air Group Inc. has initiated a $1.5 billion financing package, comprising a mix of high-grade bonds and a loan, to refinance debt related to its acquisition of Hawaiian Holdings Inc. The company, via its subsidiary AS Mileage Plan IP Ltd., is tapping into the secured debt market to lower borrowing costs while maintaining investment-grade ratings for this transaction.
On Tuesday, the airline’s unit began selling bonds in two tranches, with the longer seven-year portion expected to yield approximately 2.125 percentage points above US Treasuries, according to a source familiar with the details. Concurrently, the same subsidiary is seeking commitments for a $750 million loan, also maturing in seven years. Both the bond sale and loan are secured by Alaska Air’s frequent flyer program, an increasingly common strategy in the airline industry to leverage valuable loyalty programs for financing.
The airline’s move to raise capital follows its acquisition of Hawaiian Holdings Inc., a deal that closed on September 18 and was initially announced in December. Alaska Air had earlier indicated it would raise $1.5 billion to refinance Hawaiian Holdings’ existing debt, a critical step in integrating the two airlines.
Lowering Borrowing Costs and Market Implications: By using secured debt, Alaska Air can obtain investment-grade ratings for these instruments, despite the parent company itself holding a junk credit rating. For instance, Moody’s downgraded Alaska Air’s overall credit rating to Ba1 from Baa3, placing it in the highest tier of speculative or “junk” ratings. However, the new secured bonds received a Baa2 rating, which is firmly within investment-grade territory. Similarly, Fitch assigned a BBB- rating to the notes, maintaining an investment-grade classification, while the parent company holds a BB+ junk rating.
This approach allows Alaska Air to borrow at more favorable terms, offering a yield spread of just over 2 percentage points compared to US Treasury bonds. While this reduces immediate financing costs, it also limits the airline’s financial flexibility, as an estimated 90% of its total debt will now be secured, according to Moody’s estimates following the Hawaiian acquisition.
Strategic and Financial Insights: Alaska Air’s strategy to refinance Hawaiian Holdings’ debt by leveraging its frequent flyer program is a strategic move that underscores the airline industry’s growing reliance on loyalty programs as collateral for capital raising. These programs have proven to be lucrative assets, generating significant cash flows that can be monetized to secure lower borrowing costs, particularly in times of economic uncertainty.
The acquisition of Hawaiian Holdings positions Alaska Air to expand its reach, especially in competitive markets like the Pacific. However, this capital structure, heavily reliant on secured debt, could pose future challenges. While it enables the airline to access lower-cost capital in the short term, it also reduces financial flexibility and limits the company’s ability to leverage its assets in the future. Investors and analysts will closely monitor Alaska Air’s ability to generate sufficient cash flow post-acquisition and manage the higher debt load effectively.
For investors, the secured nature of the debt reduces risk, which could make Alaska Air’s bonds and loans more attractive, especially as they carry an investment-grade rating. This could provide a reliable income stream for bondholders, even as broader market conditions fluctuate.
Expanded Analysis:
Alaska Air’s acquisition of Hawaiian Holdings and its subsequent refinancing efforts showcase a broader trend in the airline industry, where companies are increasingly relying on secured borrowing to manage substantial debt. By securing the debt with valuable assets such as loyalty programs, Alaska Air can tap into the high-grade bond market, reducing its borrowing costs despite the parent company’s junk rating. This is a tactic that investors are familiar with, having seen other airlines use their frequent flyer programs in similar ways, particularly during the pandemic.
However, the concentration of secured debt comes with risks. While Alaska Air is benefiting from investment-grade ratings for this particular tranche of debt, its overall credit profile remains in speculative territory. Should the airline face future financial difficulties, its limited flexibility to raise additional secured debt could be a constraint. Investors should weigh these factors when considering the potential profitability of the bonds and loans, as well as the longer-term outlook for Alaska Air’s financial health.
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