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UA uses Mileage Plus for collateral for $5B Loan

UA uses Mileage Plus for collateral for $5B Loan

Old Jun 15, 20, 6:36 am
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UA uses Mileage Plus for collateral for $5B Loan

UA to use Mileage Plus for collateral for $5B Loan.
Reported on CNBC on Squawk Box.
Now reported on Reuters.

Debated whether loyalty program is worth that much. Also debated customer use of UA credit cards and impact.

Last edited by cova; Jun 15, 20 at 9:26 am
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Old Jun 15, 20, 7:10 am
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I suppose this is a good thing for those with status - to maintain value UA can't just tell us all to stuff it.

But, boy, what imaginative accounting it must take to establish a value for purposes of obtaining a loan. Certainly the program has some value - it gives UA increased revenue from loyal travelers. But it's not exactly an asset someone else can easily monetize, even if the loan issuer somehow "seized" the collateral it would still rely on UA to implement the program in a way that paid off the loan.
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Old Jun 15, 20, 7:21 am
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Based on its earnings and cash flow, MP is valued at $21B.

Lots of details here:

https://www.sec.gov/Archives/edgar/d...4d3_ex99-1.htm
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Old Jun 15, 20, 7:22 am
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Kudos to United's CFO and investment bankers for creativity.
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Old Jun 15, 20, 7:24 am
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The valuation is mainly based on how much revenue selling miles generates, not so much on a creative accounting of loyalty inspired.

I do agree that it is kind of a funny money accounting, though -- hard to see it really being that valuable to someone else (cf. Aeroplan).
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Old Jun 15, 20, 7:29 am
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I wonder what UA thinks it can get its cash burn down to in Q4 once they lay off a whole bunch of people. At this point, it seems like UA is borrowing as much as it can in hopes it will have enough liquidity until demand turns / a vaccine is found and widely distributed.
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Old Jun 15, 20, 7:46 am
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Originally Posted by fly18725 View Post
Based on its earnings and cash flow, MP is valued at $21B.

Lots of details here:

https://www.sec.gov/Archives/edgar/d...4d3_ex99-1.htm
Interesting info. MP buys miles from United for $0.01 and sells to Chase for $0.02. Nice profit there.
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Old Jun 15, 20, 8:09 am
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This is the most creative financing I have ever seen.
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Old Jun 15, 20, 8:20 am
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Originally Posted by fly18725 View Post
Based on its earnings and cash flow, MP is valued at $21B.

Lots of details here:

https://www.sec.gov/Archives/edgar/d...4d3_ex99-1.htm
Yes, some great reading.

Also, of note, is that it appears UA is planning another stock offering for about ~$1b of equity at current prices.

Originally Posted by rambutan View Post
This is the most creative financing I have ever seen.
It's hardly earth-shattering. The market views airline loyalty programs differently, starting with the value of co-brand card agreements/bulk mileage sales, partnership diversity and the non-airline currency ecosystem that's largely developed over the last decade. The value of the loyalty program is no longer inextricably linked to the viability of the underlying air carrier; one case in point is Avianca LifeMiles.

Last edited by EWR764; Jun 15, 20 at 8:25 am
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Old Jun 15, 20, 8:40 am
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For context, in 2019 mileage sales generated a bit over $5b. The 2020 figure may possibly wind up a bit down from that, but this could be viewed as an advance on the next year-ish of program revenue. So it is creative perhaps in the sense of leaving no stone un-turned, but not in terms of making numbers from whole cloth.

It will affect UA's profitability for a while, but probably it has not much impact upon the MP program.
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Old Jun 15, 20, 9:10 am
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[WSJ] United to Put Up Frequent-Flier Program for $5 Billion Loan

Interesting WSJ article that United will use MileagePlus as collateral for a loan.

The most interesting part of the article is:
United said its MileagePlus program generates over $5 billion in cash a year and is worth over $20 billion.
I wonder if they have people who understand programs really value these. I understand most people just redeem for coach and are happy but there has been so many devaluations.

https://www.wsj.com/articles/united-...an-11592227825 (behind paywall)

Last edited by WineCountryUA; Jun 15, 20 at 10:52 am Reason: moved to exisiting thread and noted paywall
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Old Jun 15, 20, 10:24 am
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Creative but not the first of its kind. It's pretty similar to what J Crew did a few years ago. Create an SPV offshore to hold assets (in J Crews case, it was their name/brands... in UAL's case it's the MP program). License the property back to the company. The UAL pitch deck even uses the same "IPCo" term. I think Goldman is/was the lead on both deals as well.
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Old Jun 15, 20, 10:31 am
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Originally Posted by fly18725 View Post
Based on its earnings and cash flow, MP is valued at $21B.

Lots of details here:

https://www.sec.gov/Archives/edgar/d...4d3_ex99-1.htm
as a PDF

Additional details (8-K)

and

on the new stock offering (another 8-K)

News Release Issued: June 15, 2020 (8:32am EDT)

United Expects To Have Approximately $17 Billion In Available Liquidity By September 2020
New, proposed $5 billion MileagePlus transaction, combined with available CARES Act funding, provides even more flexibility to navigate the most disruptive financial crisis in the history of aviation

CHICAGO, June 15, 2020
-- United Airlines (NASDAQ: UAL) today announced that it expects to have total available liquidity of approximately $17 billion at the end of the third quarter of 2020.[1] This dollar amount reflects committed financing of $5 billion to be secured by the airline's loyalty program, MileagePlus, that allows the airline to continue to operate, evolve, and grow the program, as well as $4.5 billion expected to be available to United through the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") Loan Program. The company believes it has sufficient slots, gates and routes collateral available to meet the collateral coverage that may be required for the full $4.5 billion available to the company under the Loan Program. This $9.5 billion of additional liquidity will provide even more flexibility as the airline navigates the most disruptive financial crisis in the history of aviation.

Given the impact COVID-19 has had on travel demand, United has spent the past several months aggressively and proactively cutting costs. The airline has already reduced planned capital expenditures and operating and vendor expenditures, suspended raises and implemented an unpaid time off program for management and administrative employees, put a freeze on hiring, introduced voluntary leave and separation programs, reduced pay for all executives and cut its CEO and President's base salaries by 100%, among other cost-saving measures. United expects an average cash burn of approximately $40 million per day in the second quarter of 2020 and to reduce its average cash burn to approximately $30 million per day in the third quarter of 2020.[2]

Goldman Sachs Lending Partners LLC, Barclays Bank PLC and Morgan Stanley Senior Funding, Inc. have committed to provide, and have agreed to arrange the syndication of, the MileagePlus financing through a term loan facility, which is expected to close, subject to standard conditions precedent, by the end of July 2020. Goldman Sachs Lending Partners LLC will act as the sole structuring agent and lead left arranger for the transaction.

MileagePlus has more than 100 million members, over 100 program partners, and is an essential asset for United. The program has historically generated material and stable revenues and free cash flows, drives customer retention, and increases customer lifetime value. United continues to invest in making MileagePlus the top loyalty program for its members. Last year the airline announced that MileagePlus miles never expire and announced a partnership with CLEAR to offer free and discounted memberships to MileagePlus members. United also introduced PlusPoints, a new industry-leading upgrade benefit for Premier members.

Last edited by WineCountryUA; Jun 15, 20 at 11:16 am Reason: more
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Old Jun 15, 20, 11:27 am
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Originally Posted by threecap View Post
Creative but not the first of its kind. It's pretty similar to what J Crew did a few years ago. Create an SPV offshore to hold assets (in J Crews case, it was their name/brands... in UAL's case it's the MP program). License the property back to the company. The UAL pitch deck even uses the same "IPCo" term. I think Goldman is/was the lead on both deals as well.
Big difference is MP is a tangible asset and generates earnings rather than just a trademark with intangible value.
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Old Jun 15, 20, 11:30 am
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What if UA defaulted on its debt and the lender(s) foreclosed on the collateral? What would they do with MP? Maybe start a brand new airline with no debt or other obligations but a built-in FF program??
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