During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed $UAL Secures A $5 Billion Loan Using Its Frequent Flyer Miles. Here’s an excerpt from the episode:
Bill: I’m going to steal the next segment because I actually think this is an interesting– I think I can segue pretty decently. The United bond offer or the debt offering, I think it’s bonds but whatever. The debt offering, look it up, I tweeted about it last night, it is insanely interesting. What we’re talking about people getting pushed out on the risk spectrum and everything that Grant has been writing about for the past three years, about how there’s no covenants in bonds and the asset transfers and stuff have been that your ability to transfer assets out of the entity, on the equity side has exploded as people have continued to chase yield. People last year were buying United bonds yielding 4% to 5%. I don’t know that there were no restrictions on asset transfers, but it’s hard for me to think that there were a ton and this also occurred.
Goldman, shoutout to you guys, because you did a solid job structuring this deal. They basically transfer the intellectual property from the MileagePlus accounts into a bankruptcy-remote entity. Okay, so the lenders of this new debt issuance– I think it was like 6.3 billion is what it was upsized to, and I think the interest rate’s roughly 3%. They have a direct claim on that entity which is the MileagePlus account. The way the MileagePlus account works is, MileagePlus pays United one cent for every dollar it acquires. United gives MileagePlus two cents. So, it’s basically like a 50% gross profit entity. It’s got some SG&A on it, but it’s probably 40% free cash flow margins, and it’s got a flow component to it. So, if you can actually buy the argument that it’s a separate business, which I’m not fully there on, I view them as pretty tied, but in a lot of places, they are separate businesses. That’s a pretty good entity. And that was just transferred outside of United’s asset base and fully leaned up.
And the bondholders that used to get bonds that yielded like 4% to 5% just got totally screwed out of one of the best assets that United has. I mean, United has $20 billion of liquidity or something like that, and I bought the same bonds that those people bought, but mine are yielding 10% yield to maturity, and I view it almost like equity. It’s just shocking to me that there were no restrictions on one of the greatest assets that this company had, and here they need the money. I don’t see how you don’t feel screwed if you own those bonds through all this. But you did it to yourself, read the fucking documents. That’s rule one. It’s not like it was hidden. But it’s just crazy that has happened. And I think it’s such a good illustration of, like Jim Grant has been writing and writing and writing for two years about how these companies can transfer assets out of the company, and the bondholders can get screwed. And this is the best example that I’ve seen.
Regardless of whether or not you like airlines, it’s a really, really fascinating structure that they put together. I thought it was a very solid job by some investment bankers and some really good attorneys. Goldman, I’ve said negative things about you. I take some of them back.
Tobias: Let me just see if I understand. The original bondholders, they’ve bought some bull markets special, covenant-light deal that had no restrictions on the underlying assets that presumably had some security against being transferred out. Somebody has figured that out at Goldman probably, and they’ve said what you should do is– the most stable part of your business or the most attractive part of this business at the moment is not flying the planes, it’s the mileage program that you have. We can take that “business,” we can take that business out, put that into a separate entity, we’re going to make that bankruptcy remote. Then we can part–
Bill: There’s 100% only on subsidiary area, right? It was structured as a separate business unit anyway.
Tobias: It was.
Bill: And yes, then they put it into bankruptcy-remote entity.
Tobias: How do you do that?
Bill: They just transfer the intellectual property assets. I’m not 100% sure.
Jake: And it’s gone.
Bill: I haven’t done a super deep dive on the thing. I was flipping through it last night. And as I was reading, I was like, “This is incredible. Whoever structured this did a really good job for their client.” And a really bad job for existing bondholders.
Tobias: If you were the bag holder in the original bonds, would you want to litigate that transaction? Assuming that it goes– they’ve probably got some period of time, they’ve got a hold on for bankruptcy over a period of time, otherwise you can look back to a transaction like that?
Bill: I don’t think so, man. I don’t think it’s a fraudulent conveyance claim. Now, we’re talking about stuff that I barely remember from law school. But the reason that they’re doing–
Tobias: Because they’re saying bankruptcy is not here. It’s bankruptcy remote. We’re not thinking about bankruptcy at this point.
Bill: Yeah. And honestly, man, they’re not. Scott Kirby from the jump has been the most nervous out of the Big Four CEOs. And he cut the deepest and he’s got the most liquidity. So, this guy is going super serious about saving the equity of the company. I think they should issue shares here. I don’t know why they aren’t. Especially since I think the equity’s got a pretty nice bid.
Tobias: Have they spoken to Robinhood?
Bill: And to be fair, I should be fair to him. He has issued equity once and then I think they’re registered to issue it again. It’s not as if he’s just levering it up.
Jake: This is like the capitalism. In order to save the equity, we have to destroy it.
Bill: They need a lot of liquidity. Liquidity matters more than anything for them right now. And they’ve got, I think they’ve got roughly– [crosstalk]
Jake: Eventually, you put enough people in line in front of you, there’s not much leftover for you.
Bill: I know, there’s a reason that I’ve told everyone that’s buying the equity, “I think you guys are making a mistake.” And if United now has done this to their balance sheet, I would be shocked if American is not having the same conversation. And now you have a system that had four healthy participants, and now you have two of the biggest ones are limping at a minimum. [crosstalk]
Tobias: Same old airline story.
Bill: Yeah. This is why Buffett sold. He’s seen this movie. Now, it might work. You might have enough consolidation to come out of this. That’s very possible but I think the odds are– [crosstalk]
Tobias: Are people flying again? What sort of capacity, do you have to have any idea?
Bill: I think the last time I looked– I do like a five-day average and I think it was down like 78%. United ticket [crosstalk] Yeah, dude, I think that– I don’t mean to laugh at them. I feel bad and I really do like Scott Kirby. But, dude, what a shitty year to take over. I think I saw that they said their ticketed passengers are down 90% in May. Running a hub– you need all that throughput through a hub–
Tobias: Good place to base the options and the restricted stock units, get them priced in here, get a big slug. Just see if you can fly it through. Get it out the other side. Make some real money.
Bill: Look, I’m sure they’ll do some of that. I don’t know that Scott Kirby– he doesn’t strike me as that kind of guy. He’s like—I don’t know. I like him.
Tobias: What do you mean he doesn’t strike? They’re all that kind of guy.
Bill: I know. I get it. I get what you’re saying. I fully expect American to do that. I hate those guys probably for no reason, but I don’t understand running a levered buyback strategy on an airline. It just doesn’t make sense to me.
Tobias: I think I can’t try that in the 80s. I think it’s been tried quite a few times. I don’t think anybody’s succeeded in it. Maybe this time.
Bill: Maybe. Fundamentals don’t matter. Why don’t we talk about your section now? See that at 1:00– [crosstalk]
Jake: When do we stop touching the hot stove of cove light? This happens every single cycle. This is supposed to be smart money buying this stuff.
Tobias: Memories are too short.
Jake: What is that?
Bill: Then in March, here I thought everything was going to get recapped and the bondholders are going to own everything. I don’t know. But this is the problem with cove light. I mean, when I was reading this transaction, I was like, “Oh, Jim Grant would have a wet dream over this after how much he’s written about it.”
Jake: This basically is just unsecured credit card debt for the– There’s nothing backing these bonds now. Some airplanes that no one wants to fly?
Bill: Well, it’s not even the airplanes because all those are– Yeah, well and they’re all mortgaged through asset-backed facilities. Basically, you have the holdco of the airline is– or maybe the opco, I’m not sure exactly what I’m trying to say. But, yes, you have the fundamental operating businesses cash generation now, which is not the most fun thing in the world to own.
Tobias: You forget the Davey Day Traders out there, long jets. That’s going to keep on working for a long time.
Bill: Now to be fair, the structure of the deal, they got a free cash flow sweep, it’s going to pay down. I don’t think United is going to disband. It certainly increases the probability. It’s not good for the current bondholders. Jaketrix
Tobias: Is he stuck? [chuckles]
Bill: I think so. Yeah.
Tobias: All right. Well, I’ll move on to my–
Bill: [crosstalk] then when he comes back.
Tobias: We’ll catch him up.
Bill: We’ll move him back in.
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