Cargo airline cashing in on junk bond boom

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  • Thursday, 06 Aug 2020

ESTERO (fLORIDA): At a little known cargo airline that handles shipments for United Parcel Service Inc and Inc, business is booming.

With passenger carriers forced to cut most of their freight capacity during the pandemic, seven-year-old Western Global Airlines LLC has picked up new orders amid a surge in online shopping.

Now, it’s benefiting from another big tailwind: the credit rally sparked by the Federal Reserve’s unprecedented backstop.

The Estero, Florida-based carrier is borrowing hundreds of millions of dollars from the junk-bond market to fund a stock program that will give it a sizable tax break, hand the founders a large payout and potentially keep its workforce union-free.

Companies have been issuing debt at a record pace since the Fed announced a series of measures in March to keep the economy going.

While that has provided much-needed liquidity to struggling businesses, the rally has been so broad-based that it has also allowed less-impacted companies to sell debt to fund payouts to shareholders.

Western Global is looking to raise US$410mil through its first ever junk bond offering as part of a plan to sell a minority stake to employees. The deal will see founder Jim Neff and other existing shareholders sell as much as 49% of the company to the employee stock ownership plan.

“We believe that our employees are the best strategic partners and view the ESOP as a win-win for both the employees and the company, ” a representative said in response to requests for comment. As essential transportation, the airline also experienced substantially higher operating costs in the Covid-19 environment, the company representative said.

Under the plan, the airline will lend proceeds from the bond offering to a newly set-up ESOP, which will use the funds to purchase the stake.

The plan will use annual contributions it receives from the company to repay the debt over time.

Western Global expects to realize significant tax benefits from the arrangement as it will be able to deduct interest on the debt and contributions made to the plan, according to people with knowledge of the company’s presentation to investors.

The deal is also expected to dissuade workers from unionizing, preserving one of Western Global’s key advantages versus competitors, the people said, asking not to be named when discussing confidential information.

The company began sounding out potential investors for the five-year bonds last week at a yield in the 8.25% to 8.5% range, some of the people said.

In a sign of tepid demand from potential investors, the range was revised on Tuesday to 8.75% to 9%.

Western Global also shifted US$10mil to a separate revolver, reducing the offering’s original US$420mil size. — Bloomberg

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