Market News

Southwest Airlines Prices Two-Tranche $1.8 Billion Debt Offering

Southwest Airlines Co. (LUV) said it has priced its public offering of $1.8 billion of debt in two tranches.

The U.S. carrier will offer to sell $500 million aggregate principal amount of 4.750% notes due 2023 and $1.3 billion aggregate principal amount of 5.125% notes due 2027. The 2027 notes will be issued at par value.

Southwest Airlines said it expects to use the net proceeds from the offering to repay all of its outstanding debt under its 364-day credit agreement and for general corporate purposes. Upon repayment, it will terminate the credit agreement. The offering is expected to close by June 8, 2020, subject to customary closing conditions.

The U.S. carrier added that the 2023 bonds are being offered as an additional issuance of its 4.750% notes due 2023, of which it sold $750 million aggregate principal amount on May 4. The notes are part of the same class as the initial notes of that series and have identical terms, other than the issue date and issue price.

Stringent travel restrictions tied to the coronavirus pandemic have brought travel demand to an almost halt, slashing the value of Southwest Airlines’ shares in half this year. U.S. airlines have been burning through billions of dollars in the first quarter incurring huge losses and implementing cost-cutting plans, as well as taking steps to shore up its cash buffers to cope with the financial fallout.

Over the past month, Southwest Airlines stock has seen some relief after reporting that in the month through May 18, it recorded net positive bookings reversing net negative booking trends prevalent during most of March and April, where trip cancellations outpaced new passenger bookings.

Furthermore, Southwest Airlines expects to bring down average daily cash burn in June to be in the low-$20 million compared with average daily core cash spending of $30 million to $35 million in the second quarter.

Last week, five-star analyst Myles Walton at UBS lifted his rating on the stock to a Buy, saying that the U.S. carrier offers the “best risk/reward” for a recovery.

Meanwhile, Cowen & Co. analyst Helane Becker reiterated a Buy rating on the shares, citing Southwest’s financial strength and leisure focus.

Becker believes that looking ahead to a reopening of the aviation industry, consumers are more likely to take a short-haul domestic flight than to book a trip to Europe.

“The industry may still be able to salvage some of the summer season,” Becker said.

Overall, Wall Street analysts are cautiously optimistic on the stock. The 13 analyst ratings are divided between 9 Buys and 4 Holds adding up to a Moderate Buy consensus. The $40.22 average price target indicates 10% upside potential in the shares in the coming 12 months. (See Southwest Airlines stock analysis on TipRanks).

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