The second largest U.S. airline, Delta Air Lines (DAL), is looking for $2.6 billion in loans to refinance debt.
The loan finance will repay debt, obtained in 2007, that was set as a reserve for any bankruptcy situation including a revolving credit line, a first-lien synthetic line of credit and a second-lien term loan.
The current first-lien debt includes a $1.225 billion, five-year revolving credit line and a $1.375 billion six-year term loan B.
First-lien debt is repaid first in a bankruptcy or liquidation event, second-lien debt is repaid subsequently. Term loan B is sold mainly to non-bank lenders such as collateralized loan obligations, bank loan mutual funds and hedge funds.
The company’s net debt position declined to $15 billion in 2010 from $17 billion in 2009. Delta Air Lines and plans to reduce its debt by another $2.0 billion this year by paying down $400.0 million of debt in first quarter 2011. Further, the company expects to reduce net debt to $10.0 billion by the end of 2012.
The company’s debt level remains high in comparison to its peers such as United Continental Holdings Inc. (UAL) and US Airways Group Inc. (LCC). Hence, it will be difficult for Delta to borrow or buy planes and might even need to finance its growth through leasing, which could become significantly expensive if interest rates rise.
Currently, we maintain our long-term Neutral recommendation on Delta Air Lines, supported by the Zacks # 4 (Sell) Rank for the short term (1–3 months).
DELTA AIR LINES (DAL): Free Stock Analysis Report
US AIRWAYS GRP (LCC): Free Stock Analysis Report
UNITED CONT HLD (UAL): Free Stock Analysis Report
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