American Airlines has announced that, on September 25th, the airline closed on a government loan with the US Department of Treasury. The loan currently is worth nearly $5.5 billion. However, there is a possibility for the company to increase that loan up to $7.5 billion, depending on how things work out at the Treasury department.

American Airlines closes on the government loan

American Airlines and the US Department of Treasury have entered into a loan agreement as of September 25th, allowing the company to borrow up to $5.477 billion. On the closing date, it borrowed $550 million, and it may, at its option, borrow additional amounts in up to two subsequent borrowings until March 26th.

Unlike airline support from March, this loan is not restricted to payroll support. American Airlines will use the funds for certain general corporate purposes and operating expenses per the terms of the loan, such as barring money for use in dividends, stock buybacks, executive compensation, etc., through at least 12 months after the repayment of the loan. American must also maintain a minimum aggregate liquidity of $2.0 billion.

American also entered into a warrant agreement with the Treasury Department. It has agreed to issue up to 43,780,975 shares of stock, based at $12.51 per share.

AA had been one of the leading US airlines pushing for a government loan. The operator has been committed to working with the Treasury Department for funding. Like all carriers, the executives at American have been working to shore up the airline's liquidity position and get through the crisis. The team at American has consistently indicated the government loan has been one of the best ways to do that.

Doug Parker, the airline's CEO, was also in Washington this week to petition the government for further payroll support through March of 2021.

A potential to increase the loan

The Treasury Department advised American that it will allocate additional funds that could increase the airline's loan to $7.5 billion, subject to final approval by the Treasury Department.

The reason for this is because some other US airlines, such as Southwest Airlines and Spirit Airlines, have foregone government loans that were previously allocated for them. Instead, those carriers have sought the private market for funding.

As a result, the Department of Treasury can allocate additional funds to other US airlines that want a loan. It is unclear if American wants to add on almost another $2 billion to its current loan term. American Airlines does have a high long-term debt burden compared to its peers, but if it needs funding and the government is providing it at an attractive rate, it may make sense for the carrier to choose to go with the government loan.

What did American put up as collateral?

American Airlines is using its co-branded credit card agreements and other loyal program participation agreements, such as cash flows, documents, and intellectual property, among others, related to the AAdvantage frequent flyer program. American Airlines can add certain types of assets to the collateral or, subject to certain conditions, release collateral.

Using frequent flyer programs as collateral for funding is something that has become very common in the industry. Most have gone to the private market, however, to get financing. Delta Air Lines recently used its SkyMiles program to raise $9 billion in funding.

Do you think American Airlines made the right decision in taking the government loan? Let us know in the comments!