Business Context and Reporting Period
This Form 8-K Current Report, dated April 29, 2020, details significant financing activities by Delta Air Lines, Inc. undertaken to support liquidity during the COVID-19 pandemic. The report covers the completion of a senior secured notes offering and the establishment of a new term loan credit facility on April 29, 2020.
Key Financial Metrics and Capital Structure
- Senior Secured Notes: Issued $3.5 billion in aggregate principal amount of 7.000% Senior Secured Notes due 2025 (increased from an originally sought $1.5 billion).
- Term Loan Facility: Entered into a $1.5 billion senior secured term loan facility (New Credit Facility), with the full amount drawn immediately.
- Total New Debt Raised: $5.0 billion combined from the Notes and the Term Loan.
- Collateral: Both instruments are secured by Delta's route licenses and airport takeoff/landing slots and gate leaseholds in the U.S., U.K., Europe, and Latin America.
- Liquidity Covenant: The New Credit Facility requires Delta to maintain minimum liquidity of $2.0 billion (defined as unrestricted cash plus available revolving credit).
- Interest Terms: Notes pay 7.000% fixed interest semi-annually; Term Loans bear variable interest at LIBOR (with a 1.00% floor) plus a margin.
Material Changes and Covenants
The filing represents a material increase in Delta's debt load and secured obligations. Key structural changes include:
- Debt Priority: The Notes and Term Loans rank pari passu with existing Priority Lien Debt secured by the same collateral. They are effectively subordinated to debt secured by other assets and structurally junior to subsidiary liabilities.
- Financial Covenants:
- Collateral Coverage Ratio: Must maintain a minimum ratio of 1.60:1 (appraised collateral value to Priority Lien Debt). Failure to meet this triggers a 2.0% per year special interest penalty on the Notes.
- Debt Incurrence Limit: The New Credit Facility prohibits incurring additional Priority Lien Debt if the collateral coverage ratio falls below 2.00:1 or if aggregate Priority Lien Debt exceeds $5.0 billion.
- Amortization: The Term Loan requires quarterly amortization payments of 1.00% per year, commencing September 30, 2020, with the remaining balance due April 29, 2023.
Outlook, Risks, and Management Commentary
Management intends to use the net proceeds for general corporate purposes and to support liquidity. The filing includes a memo from CEO Ed Bastian to employees regarding the company's situation. Significant risks and contingencies identified include:
- Pandemic Impact: Material adverse effects of the COVID-19 pandemic on business operations.
- Debt Burden: Risks associated with incurring significant debt to respond to the pandemic.
- Covenant Compliance: Restrictions on financial and business operations due to covenants in financing agreements.
- Operational Risks: Fuel costs, labor issues, geopolitical conflicts, and potential accidents or IT disruptions.
- Forward-Looking Statements: The company cautions that actual results may differ materially from estimates due to the uncertainties listed above.
Investor Verification Checklist
- Verify the current appraised value of the collateral (route licenses and slots) to assess the Priority Debt Coverage Ratio against the 1.60:1 covenant threshold.
- Confirm the company's current unrestricted cash and available revolving credit to ensure compliance with the $2.0 billion minimum liquidity covenant.
- Review the specific margin applied to the LIBOR rate for the $1.5 billion Term Loan to calculate total interest expense.
- Monitor the company's ability to meet the quarterly amortization payments starting September 30, 2020.
- Assess the impact of the 2.0% special interest penalty on the Notes if the collateral coverage ratio falls below 1.60:1.