Why would somebody sell bonds that last required a 12% effective coupon to move (11.5% coupon but they sold below par in June) to refinance a government loan at LIBOR (currently about 1%) plus 3.5%.
Either you believe there is going to be massive inflation driving the inflation rate up to five or six times what it is now (possible, but unlikely in as short a period as five years) or you REALLY want to get out from under the executive compensation limits under the CARES Act.
Executive Compensation Limits
Section 4004 executive compensation limits begin on the execution date of a loan or loan guarantee, and they end one year after the loan or loan guarantee has been satisfied (the “restriction period”).
During the restriction period:
No officer or employee whose total compensation was more than $425,000 in 2019 (other than those employees whose compensation is determined by an existing collective bargaining agreement entered into before March 1, 2020) may receive:
- Total compensation during any consecutive 12-month period that exceeds their total compensation received during calendar year 2019; or
- Severance pay or other benefits upon termination of employment that exceeds twice (2x) their maximum total compensation received during calendar year 2019.
No officer or employee whose total compensation was more than $3 million in 2019 may receive:
- In excess of $3 million; and
- 50 percent of the amount that their total compensation for calendar year 2019 exceeded $3 million. (For example, if total compensation is $4 million, the officer or employee may not receive more than $3.5 million — $3 million plus $500,000.)
“Total compensation” is defined in Section 4004(b) as “salary, bonuses, awards of stock, and other financial benefits provided by an eligible business to an officer or employee of the eligible business.”
On the good news front, Fitch isn’t contemplating further credit downgrades at present, although they just downgraded the senior secured debt already out there, which will drop its value in the secondary markets.
RATING ACTION COMMENTARY
Fitch Affirms American Airlines at 'B-'; Removes Rating Watch Negative
Mon 08 Mar, 2021 - 8:54 AM ET
Fitch Ratings - Chicago - 08 Mar 2021: Fitch Ratings has affirmed American Airlines' Long-Term Issuer Default Rating (IDR) at 'B-' and has assigned a Negative Rating Outlook. The ratings have been removed from Rating Watch Negative. In addition, Fitch has downgraded American's existing senior secured debt ratings to 'B'/'RR3' from 'B+'/ 'RR2'.
The removal of the Negative Rating Watch follows several positive events since Fitch's prior review. Liquidity has been bolstered by an increased allocation under the government loan program (to be replaced by the loyalty program issuance) and a renewed payroll support program. Meanwhile, the rollout of multiple effective coronavirus vaccines has increased the likelihood of a meaningful rebound in air travel starting some time in 2021, lowering the likelihood that American will continue to burn cash for a prolonged period. Positive factors are tempered by air traffic that remains at low levels, which has driven down Fitch's expectations for passenger traffic for the year. The Negative Outlook reflects continued pressure on the airline industry and uncertainty around the pace of recovery.
The downgrade of American's senior secured debt to 'B'/'RR2' from 'B+'/'RR3' reflects the growing amount of senior secured debt in American's capital structure which may dilute recovery prospects in a distress scenario.