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Alaska Air Sells Bonds, Loan to Refinance Hawaiian Debt

An Alaska Airlines Boeing 737 Max-9 aircraft grounded at Los Angeles International Airport (LAX) in Los Angeles, California, US, on Monday, Jan. 8, 2024. Boeing Co. took the first step toward returning its grounded 737 Max 9 jetliners to service, issuing guidance to airlines on the inspections required following a mid-air structural failure late last week. Photographer: Eric Thayer/Bloomberg (Eric Thayer/Bloomberg)

(Bloomberg) -- Alaska Air Group Inc. on Tuesday sold around $2 billion of debt secured by its frequent flyer program, to refinance borrowings tied to its acquisition of airline Hawaiian Holdings Inc.

On Tuesday, Alaska Air subsidiary AS Mileage Plan IP Ltd. sold $1.25 billion of notes in two parts, according to a person with knowledge of the matter. The longer portion of the offering, a seven-year note, yielded 1.7 percentage point above Treasuries after earlier discussions for around 2.125 percentage points, said the person, who asked not to be identified as the details are private.

The same unit also sold a $750 million loan maturing in seven years on Tuesday, paying 2 percentage points over the Secured Overnight Financing Rate. The airline didn’t respond to a request for comment.

The debt saw relatively high demand, allowing the firm to improve the pricing and boost the originally planned size of the total borrowing. Alaska Air said last month that it planned to borrow $1.5 billion to help refinance Hawaiian Holdings debt after having acquired the company, a purchase that it said closed on Sept. 18. The acquisition was announced in December.

Borrowing on a secured basis is cutting Alaska Air’s borrowing costs by allowing it to win investment-grade ratings for the debt even as the parent company carries junk ratings. On Sept. 24, Moody’s Ratings cut the airline’s credit rating to Ba1, the highest junk level, from Baa3, the lowest investment-grade score. 

But Moody’s gave the planned secured debt obligations a rating of Baa2, the second lowest investment-grade score. Fitch has the notes rated BBB-, the lowest investment grade, while the parent company is BB+, the highest junk rating. 

Based on financials when the acquisition closed, and accounting for Hawaiian’s loyalty notes getting repaid, about 90% of Alaska Air’s debt will be secured, Moody’s estimated last month. Relying so heavily on secured borrowing is a negative for Alaska Air because it reduces the company’s flexibility, the bond grader said.

Some of Hawaiian’s notes backed by its loyalty program that will be refinanced include senior secured notes due in January 2026, a positive for a business that was under pressure, said Matt Woodruff, head of transportation at CreditSights. Obstacles including declining travel due to wildfires in Maui and competition from Southwest Airlines, have significantly reduced profitability for the airline.

“What they were trying to do is make sure that they refinance this maturity that they had coming due,” Woodruff said.

--With assistance from Michael Tobin and Jeannine Amodeo.

(Updates with pricing details.)

©2024 Bloomberg L.P.