On April 23, JetBlue (NASDAQ:JBLU) announced that it had secured a grant of $685.1 million from the U.S. Treasury along with a $250.7 million loan as part of its Payroll Support Program Agreement with the federal government. Any financial aid at this point is good news for owners of JBLU stock.
The big question is whether taxpayers will make money on the warrants granted by the airline as part of its agreement with the Treasury.
The Terms of the Deal
Like every airline that gets money from the Treasury, it must adhere to the CARES Act, which includes using the $935.8 million in support funds for payroll purposes only. Also, it must maintain certain levels of commercial air service through March 1, 2022, do no share repurchases or pay dividends through Sep. 30, 2021, and restrict some aspects of executive compensation.
Should it fail to comply, JetBlue could be forced to give back the entire $935.8 million, including interest.
However, given the financial terms of the agreement, it’s hard to imagine any airline would be stupid enough to breach its agreement.
First of all, 73% of the Payroll Support Payment is a grant. It’s free money. If you won a $60 million lottery and the only condition was that you had to be a good citizen, I think we know what you would do.
As for the $250.7 million loan, it’s repayable in full in 10 years. The first five years come with an interest rate of 1%. On April 24, 2025, an interest rate of 2% plus the current Secured Overnight Financing Rate (SOFR) would apply for the next five years through April 23, 2030.
In case you’re wondering, the current SOFR is 0.05%. Up until March, it had been above 1.5% for most of the previous two years. I would assume JetBlue will be paying 3.5% interest for the second half of the 10-year term. Still a good deal.
Now to the warrants.
As a final consideration, JetBlue has issued warrants to buy 2.64 million shares of JBLU stock anytime in the next five years at an exercise price of $9.50 a share. As I write this, JetBlue is trading at $8.30, down from $21 in late February.
If you didn’t know about the coronavirus, you would swear the U.S. taxpayers were getting a good deal. Only 14% out of the money with five years in which to get in the money. Over the past five years, JetBlue has traded between $15 and $25, only falling below that range in early March.
Sweet.
They Should Have Gotten More JBLU Stock
Let’s assume that JetBlue’s stock goes from $8.29 to $19 in the next five years. The Treasury would make $25.1 million on its warrants. That’s million with an M.
Considering the government forked over $685 million in grant money, you would think it would have gotten a much better deal. I’m not suggesting it should have been issued 72 million warrants ($685 million divided by $9.50), but certainly more than 2.6 million.
Talk about a sweetheart deal.
And before you get upset for me picking on JetBlue, the same terms generally apply to all the airlines. United Airlines (NASDAQ:UAL) issued 4.6 million warrants at a strike price of $31.50 a share. As I write this, UAL stock is trading at $22.75, 38% out of the money. You get the idea.
During the Great Recession, the Treasury put $49.5 billion into General Motors (NYSE:GM). The Treasury got 912 million shares in GM for its trouble. The final 31.1 million shares were sold on Dec. 9, 2013. It lost $10 billion on GM shares over a little more than three years.
The saved jobs aside, it wasn’t a great investment for the Treasury. It appears the same is true of its airline bailout. Perhaps it wants to limit the taxpayers’ exposure to the vagaries of the markets.
Assuming JetBlue remains flying over the next five years and its stock reverts to the mean, I don’t think there’s any question the Treasury will make money on its warrants.
Does that mean you should lay down a bet on JBLU stock?
After Warren Buffett bailed, I think it’s pretty clear that airlines aren’t a winning proposition in the near term. Once a vaccine is found, and the world gets back to living, I think the risk/reward becomes much clearer.
Until then, I’d look elsewhere.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
