The deal allows United to sell debt at tax-exempt rates, which are generally lower than corporate bond yields. — Bloomberg
NEW YORK: The municipal-bond market’s lagging run is opening up an opportunity for corporate-debt investors eager to secure extra yield.
Junk state and local government bonds have underperformed high-yield corporate debt during the selloff that raced through fixed-income markets over the past several months, pushing their yields up by more.
That’s created a gap between debt that United Airlines has sold in the corporate and municipal markets: Its muni securities, which are tied to payments it makes on airport leases, are yielding half a percentage point more than the airline’s other taxable obligations, according to an analysis by Bloomberg Intelligence (BI).
That trade is poised to be further illustrated by a US$1bil muni deal that United is slated to price this week to finance costs related to a terminal renovation at George Bush Intercontinental Airport (IAH) in Houston.
While the bonds are issued by Houston, they’re secured by payments made by United and an unconditional guaranty from the airline, according to offering documents.
That means when investors consider whether to buy the debt, they are evaluating the credit quality of United rather than the city or its airport.
“If an investor is buying United corporate debt, you should absolutely be looking at this deal,” said Eric Kazatsky, senior US municipals strategist at BI.
“It’s the exact same credit, just with more yield just sitting on the sidelines.”
Corporations – such as airlines – can access the US$4 trillion municipal bond market for certain projects that serve the public.
IAH is a United hub and transported more than 46 million people last year.
The deal allows United to sell debt at tax-exempt rates, which are generally lower than corporate bond yields.
“In this particular transaction the primary risk is whether or not you’re comfortable taking senior unsecured risks to United Airlines,” said Sean McCarthy, principal and head of municipal bond research at PGIM.
“If you’re an investor, your primary decision point is going to be your comfort level around United Airlines.”
The bonds are rated BA3 by Moody’s Ratings and BB- by Fitch Ratings, both below investment grade.
United had its outlook revised to positive by Fitch earlier this month, indicating its credit rating could be lifted.
That reflects the firm’s expectation for “continued credit metric improvement and solid financial performance relative to peers,” according to a Nov 4 release.
“The company is paying down debt while maintaining substantial liquidity and financial flexibility,” according to the Fitch analysts.
Though, the company’s considerable multi-year capital spending programme remains a credit concern.
Terminal B at Houston’s IAH is in the third phase of renovations which include the construction of the north concourse to accommodate 22 gates, replacement of the baggage handling system, and upgrades to the south concourse to support larger jets, according to bond documents.
All of the new infrastructure will be used by United, which accounts for more than 70% of airport passengers.
The project is anticipated to cost about US$2.55bil, financed by the debt sale and future United funding.
Houston has agreed to reimburse United as much as US$624mil for projects related to the development.
Construction began in 2023 and is expected to be completed in 2028.
Because of the lease agreement between Houston and United, the airline is obligated to make debt-service payments on the bonds, according to a statement from Matt Smith, a spokesperson for the city’s controller’s office.
“United is a name that will always have a bid because it’s easily recognisable and incredibly liquid,” said Kazatsky.
“Cross-over investors – or buyers interested in both taxable and tax-exempt debt – may be interested in this sale, as well as international shops.” — Bloomberg
