Delta’s Newest Bond Issue Comes at a Price

Delta Air Lines (NYSE:DAL) recently sold $1.25 billion in unsecured, five-year bonds yielding 7.375% and maturing in January 2026. If you’re an investor in search of income, that’s awfully enticing. However, if you own DAL stock, it might not be the best thing for your common stock investment. 

Source: Lerner Vadim /

Here’s why. 

DAL Stock Performance Is Flat Since Bond Sale

Since Delta sold the unsecured notes on June 12, Delta’s share price is basically flat in the five days of trading following the sale.

Originally, Delta was looking to sell the bonds with an 8% yield. The lower interest rate, not to mention the fact they’re unsecured, suggests the credit market is getting healthier. At the end of April, Delta sold $3.5 billion of senior secured notes yielding 7% and maturing in 2025. The airline, despite its lack of passengers, secured more than double the original amount the airline expected to raise. 

Since March, Delta’s raised more than $10 billion to keep it afloat. As part of strengthening its balance sheet, it also got a $1.6 billion loan from the federal government as well as $3.8 billion in grants toward employee payroll. 

At the same time, the company has cut operating expenses by more than 50% compared to last year, bringing its daily average burn rate down to $40 million by the end of June, less than half the $100 million at the end of March. By the end of this month, Delta expects to have total liquidity of $14 billion. It expects that to fall to $10 billion by the end of 2020.

This is an airline doing everything it can to remain in business. But will it be enough?

Bankruptcy Is a Possibility

One would think that if Delta was able to sell $1.25 billion in unsecured debt – never mind that it was at 7.375% or about 23 times the interest on a five-year U.S. Treasury note – that the buyers of those bonds would be confident about Delta’s future. And if they are confident about that future, the odds of Delta filing Chapter 11 are quite remote.  

However, shortly after selling the unsecured notes in June, the subject of bankruptcy was on the mind of InvestorPlace’s Dana Blankenhorn.

“In normal times Delta’s long-term debt of $17.9 billion, including $5.2 billion in capitalized leases, would not be a problem. But the novel coronavirus is real, and it’s going to be around for a while,” Dana wrote on June 12. 

That’s the understatement of the year. Florida, Georgia, Texas and some other southern states are starting to set records for the number of daily cases in those states since the beginning of the pandemic. 

The losses at all the airlines are going to be significant over the remainder of the year. As Dana points out, even with a reduction of its daily burn rate from $100 million down to $40 million, it will still lose $3.6 billion in the third quarter.

Blankenhorn finishes his article by saying that bankruptcy would enable CEO Ed Bastien to do what’s necessary to make the airline a viable organization for years to come. It would be the company’s second bankruptcy in 15 years, but who’s counting?

At the moment, Delta’s Altman Z-Score is 1.17. Anything under 1.81 suggests a company is in distress and could enter bankruptcy proceedings within the next 24 months. 

The Bottom Line on DAL Stock

Despite the fact DAL stock recovered almost 36% of its value in the last month, it is still down more than 48% for the year. Where it goes next really depends on what the virus does. If a second wave takes hold, the idea of people traveling by air goes from not very likely to highly implausible. 

Billionaire investor Howard Marks believes that the risk for investors at the moment outweighs the possible rewards. 

“[I]t seems to me that the potential for further gains from things turning out better than expected or valuations continuing to expand doesn’t fully compensate for the risk of decline from events disappointing or multiples contracting,” Marks recently wrote in a memo to clients.

“In other words, the fundamental outlook may be positive on balance, but with listed security prices where they are, the odds aren’t in investors’ favor.”

So, despite the good news about Delta securing $1.25 billion in new cash from its recent bond sale, the bad news is that it might have come at the expense of existing shareholders.

The next few weeks and months are critical to Delta’s survival. As I said in early June, I think buying its stock right now is a losing proposition

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.

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