According to a Bloomberg report, Delta Air Lines (DAL) has set an interest rate of 3.75-4.00 percentage points for its $2.6 billion in loan. Notably, the loan was taken a few days back to refinance debt.
The loan is divided in two parts, comprising $1.225 billion five-year revolving line of credit and $1.375 billion six-year term loan B. The company’s interest rate is higher than LIBOR of approximately 1.25% of minimum interest rate that is expected to be levied on both parts of the loan.
The carrier is expected to sell the six-year term loan at a discount of 1 cent per dollar in an effort to foster investor yield and reduce the loan. Term loan B is usually sold to non-bank lenders such as collateralized loan, bank loan, mutual funds and hedge funds. The loan will be recorded as first-lien debt, which implies it will be repaid first in case of bankruptcy or liquidation of the company.
Delta’s net debt position declined to $15 billion in 2010 from $17 billion in 2009. The company 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, Delta 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 Rank (Sell) 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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