There's a Price for Everything

The debt markets don't get daily attention in this newsletter, but that's not to say they're not important. In fact, bonds often signal trouble well before stocks. It's just harder to see changes in bond prices, which aren't nearly as liquid as stocks and aren't easily bought by retail investors. 

But a story today by Barron's Alexandra Scaggs caught my attention -- Netflix and Delta Air Lines sold billions worth of debt on Thursday. It's no surprise that investors would be willing to buy Netflix bonds right now, but debt from Delta? That's surprising. The airlines are in dire straits, after all, so why would an investor buy bonds that could prove worthless if Delta begins to miss debt payments in the coming months? Well, as they say, there's a price for everything. 

First for Netflix: The company's debt, which spends massively on content, is technically still rated as junk. But no one is questioning Netflix's staying power these days. Earlier this week, the company reported nearly 16 million new subscribers in its latest quarter. That success is helping Netflix price its latest bonds -- $1 billion worth -- with a relatively low yield of 3.625%, below initial expectations from underwriters, Alex notes.  The bonds are unsecured, so there's no special investor protection built into the debt. 

Investors haven't been quite so forgiving with Delta, which was forced to get creative with its $3 billion debt sale. Here's more from Alex: 

The split-rated company—it has two junk ratings and one investment-grade rating—will provide extra security to investors who buy its bonds.

Term loans usually have stronger claims on company assets than the typical bond; in other words, if the company defaults, investors who own loans get paid before those that own bonds.

But the company will also give its bondholders stronger claim on some of its assets as collateral: It is securing its bonds with airport slots, gates, and routes.

Specifically, it is securing the loans and bonds with slots at airports in New York, Washington, D.C., and London, as well as European and Latin American routes, according to CreditSights.

There are some potential issues with using airport slots and flight routes as collateral, CreditSights points out, “since they can neither be liened nor owned or used by non-airline persons.” The firm estimates the bonds could be sold with a yield around 5%.

“Slots in the U.S. are used by airlines, but not owned by airlines according to the FAA [Federal Aviation Administration]. Incumbent airlines feel they should be able to trade or sell slots freely while the FAA claims only it has the right to assign them,” analyst Roger King writes. “The issue has not been litigated to conclusion because neither party can afford to lose.”