American Airlines Inks $5.5B US Treasury Loan; Shares Rise

Shares in American Airlines Group rose 2.5% in Friday’s extended market session after the ailing airline secured a $5.48 billion loan agreement from the US government.

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The stock closed 4.4% higher on Friday. Under the terms of the US Treasury facility, American Airlines (AAL) may have an option to increase the loan in October by an additional almost $2 billion to an aggregate $7.5 billion. The additional amount of the facility, which is made available under the US Coronavirus Aid, Relief, and Economic Security Act (Cares Act), is still subject to US Treasury approval.

American said it already borrowed $550 million from the loan facility backed by its loyalty program and may borrow additional amounts in up to two subsequent borrowings until March 26, 2021. The proceeds from the loan facility will be used for certain general corporate purposes and operating expenses, the airline added. The interest rate for the $550 million loan drawn will be 3.87% per annum for the period from the closing Date through September 15, 2021.

All advances under the loan facility will be in the form of term loans, all of which will mature and be due and payable in a single instalment on June 30, 2025. Furthermore, the terms of the loan agreement put certain restrictions on the airline’s ability to pay dividends, repurchase common stock or make certain investments. In addition, the US airline will need to maintain a minimum aggregate liquidity of $2 billion.

Shares in American have lost 57% of their value so far this year as stringent travel restrictions tied to the coronavirus pandemic have brought travel demand to an almost halt. US airlines have been burning through billions of dollars incurring huge losses and implementing broad cost-cutting plans, as well as taking steps to shore up its cash buffers. (See American Airlines stock analysis on TipRanks).

Citigroup Stephen Trent last week reiterated a Sell rating on AAL, citing the airline’s highly stressed balance sheet and signs of “weak but slowing” revenue improvement.

Looking ahead air travel demand still looks depressed. Trent points to early data, which indicate that passenger revenue for US airlines will be down 75% to 80% in November, compared with a year ago, though he does see some “marginal improvement” in recent trends.

Overall, the rest of the Street is sidelined on the stock. The Hold analyst consensus breaks down into 2 Holds, 4 Sells and versus 3 Buys. The $12.25 average analyst price target implies shares are more than fully priced at current levels.