May 7, 2020 - Economy & Business

Troubled companies snub government bailouts for private market money

Felix Salmon, author of Edge

Illustration: Aïda Amer/Axios

Forgoing public funding is a lot easier if you can tap private markets to get the money — which is exactly what a lot of troubled companies have been able to do.

Why it matters: In the early days of the crisis, while markets were plunging, strong companies borrowed billions of dollars in cash just because they could. Now, with markets looking much healthier, weaker companies are finding themselves able to issue new debt and equity in an attempt to avoid bankruptcy.

Exhibit A: Boeing asked for a $60 billion bailout when the crisis hit, and ended up with $17 billion of federal loans earmarked for it as part of the CARES Act. The company still hasn't recovered from its 737 MAX crisis, and none of its airline customers are buying planes in any case. But investors are happy to lend it money all the same.

  • Boeing accepted no government money, in the end. Instead, it comfortably raised an astonishing $25 billion in the private debt markets, with maturities stretching out as far as 2060.
  • The company's new $4.5 billion 10-year bond came at a yield of 5.15%, well below initial expectations that it would have to yield about 5.9%. Even the $3.5 billion 40-year bond pays less than 6%.

Airlines have also been raising private funds. There was $5 billion of new debt (subscription) for Delta, $2 billion of loans for Southwest alongside another $2 billion in new equity, and a $1 billion sale of new shares by United.

  • Airlines famously go bankrupt a lot. Delta only emerged from bankruptcy in 2007, for instance. But in this case, they seem to be able to continue raising money by borrowing against their assets, such as landing slots.
  • Bankruptcy makes it easier for airlines to cut union jobs and pensions, but those aren't the problem in this crisis.

Other troubled companies are also finding new money. The movie-theater chain AMC raised $500 million, for instance. And Carnival Cruises — which has announced that it will resume sailing on Aug. 1, despite grave concerns from the CDC — raised $6.25 billion.

The big picture: Junk-rated companies are able to issue new senior debt because previous lenders allowed them to. As Axios' Dion Rabouin has reported, loan covenants — the things that normally prevent existing lenders from being subordinated — weakened significantly in the run-up to the crisis. That has made it easier for companies to find new sources of funds.

The bottom line: The Fed has not yet started buying up corporate bonds. But by wading into the market and spending trillions of dollars on Treasury bonds and other risk-free assets, it has effectively unleashed billions of dollars of new money well down the credit spectrum.

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