RadialRover

Good thing we’re posting about Latam in the American thread. Honestly, if he wasn’t posting irrelevant articles to himself, I’d figure something was up; it’s like a heartbeat.

Excargodog

Your concern for me is touching. But it’s also posted in the Delta thread. The implications of the huge increase in the cost of debt for junk-rated companies, which include most of the majors, are general even if they affect some more than others.

ImSoSuss

exorcist dog is the type of person, and we all know this person, who for the last 15 years has been screaming that the next recession is just right around the corner. Now that there are indications that it is finally here they are gloating like: "look how smart I was", even though they've been wrong the last 14 out of the last 15 years. Then they give you a facial expression like this:

Excargodog

Ad hominem attacks do not change reality. Reality is that debt financing for junk-rated companies has nearly tripled in cost and if you don’t think that affects airlines - most of which are junk-rated after COVID - you are simply wrong.

Now neither you nor I can change that reality, but the knowledge and acceptance of that reality can perhaps help to plan for it a little better. Denial may be more comfortable than facing reality but it is not really that effective.

pangolin

They are acting. They are breaking scope to put 79 seats in all of their WO 76 seat CRJs.

JulesWinfield

Why do rising interest rates have any bearing on junk bonds American already sold? The bonds are secured at relatively low rates, sub 7% last time I checked, which seem like a bargain in this environment. There's really no reason to refinance debt, as they have decent rates locked in. Now, I will be the first to admit that their balance sheet is atrocious, but as long as they continue to cash flow, they will be able to service the debt.

METO Guido

150 butts or more is where the show can't just clear EBITA indefinitely. Going to require a star performance.

Excargodog

The debt is in bonds that have maturity dates when they MUST be paid off. American only has to pay the coupon on them now - which was probably about 3.5%. But eventually they need to pay the face value back to the bond owners. If American has the free cash to pay them off at that time - no problem. And currently they do have some excess liquidity that may be adequate for their near term needs. But they cannot afford to take the liquidity too low. Some of those bonds were sold with provisions giving the buyers the right to call for them to be redeemed immediately if liquidity goes below certain levels and some of their liquidity is itself lines of credit with variable interest rates. So it is likely that some - likely most - of those bonds that were sold at the exceedingly low coupon rate will have to be paid off by selling new bonds at current prices and coupons - which for b- rated bonds are pretty bad right now. They will also be using used aircraft as collateral, rather than new aircraft which was the case when the original bonds were sold which will tend to drive up rates as well.

I’m not criticizing AA management and certainly not the pilot group. Airlines need a lot of capital and new aircraft generally are more fuel efficient and cheaper to maintain than older aircraft and much of this debt went to buy aircraft and doing it back when rates were low was smart business. They couldn’t have anticipated COVID. But because of COVID (and the in my opinion excessive governmental restrictions they justified by COVID, AA didn’t get the return on investment they would have and should have gotten from taking on this debt. PSP was great for pilots - avoiding furloughs and all - but no one was paying the airlines for the profit they WOULD have made or paying their non payroll costs like debt service and they all took a hit. Not AA’s fault, they couldn’t have predicted COVID or the over reaction to it, it just hurt them more because of the timing of their fleet buy. But for COVID, they’d probably be the best off of the legacies right now.

But COVID did happen and if the free cash isn’t there to pay the PRINCIPAL then they’ll have to refinance and currently the rates for new junk debt are likely to be three times what they originally paid. That’s no exaggeration. Heck, Credit Suisse may fold because they underwrote a b-rated finance package that no one would buy.

https://www.reuters.com/business/fin...ce-2022-09-21/
https://www.wsj.com/livecoverage/sto...aAVE9OYzyohpQY

And Credit Suisse finances about $1.5 TRILLION in assets.

Now these interest rates basically are Fed driven, but the Fed is on record saying they are going to continue to RAISE rates until they squeeze inflation down to 2%, so there is little prospect for immediate relief.

https://www.bankrate.com/banking/fed...rates-in-2022/

Excargodog

hercretired

I don't believe AA's debt is "junk" status officially