Pandemic-hit companies dash for cash after market rally

American Airlines has raised about US$500m in a stock sale. Photo / AP

Companies hit hard by coronavirus including American Airlines, the cruise ship operator Carnival and the German flag carrier Lufthansa are racing to raise billions of dollars of fresh cash, taking advantage of market optimism that an effective vaccine is close.

American raised about US$500 million ($732m) in a stock sale while Carnival on Tuesday disclosed that it would sell stock worth as much as US$1.5 billion to help it survive the pandemic. Lufthansa raised €600m through a convertible bond offering, increasing the size of the deal after it received strong demand from investors.

The rush to raise capital follows a rally in the stock prices of companies in the travel and hospitality sector on Monday after early results showed a Covid vaccine developed by Pfizer and Germany's BioNTech was found to be more than 90 per cent effective.

Shares of the NYSE Arca Airline index jumped 19.4 per cent on Monday, its biggest one-day gain since the worst of the market turbulence in March. Hotel and cruise line shares also rebounded sharply, providing an impetus for managers at companies across the industry to raise cash.

"With the potential vaccine I think chief financial officers can analyse where they need to be two quarters from now and can look to investors and say maybe this is the last time we need to raise capital before things begin to normalise," said Brad Miller, UBS's co-head of equity capital markets in the Americas.

Companies have already raised record sums through debt markets to sustain themselves through the recession, with airlines and cruise operators offering their planes and ships as collateral to secure financings.

Carnival has raised more than US$10b since the start of the pandemic, while American has raised US$16.7b. American said on Tuesday that, along with a separate US$1b share sale that it is still undertaking, it would have US$14.5b worth of liquidity by the end of the fourth quarter.

Other companies could soon follow in their footsteps.

"If American's offering goes well, we may see other airlines coming to market," said Max Gokhman, head of asset allocation for Pacific Life Fund Advisors. "There is a need for cash as it doesn't seem they will get it from a [government] fiscal package."

Both industries, alongside hotel and cinema owners, have been particularly bruised by the virus and the shift by many consumers to stay home. American reported a pre-tax loss of US$3.1b in the third quarter on revenue that fell 73 per cent from a year earlier. In the third quarter, the airline was burning through US$44m a day.

According to a survey from Morgan Stanley, cruise booking volumes fell between 80 and 90 per cent last month compared with last year and the number of consumers seeking cash refunds instead of vouchers for future cruises is rising.

Shares of travel and leisure groups remain far below pre-pandemic levels. But even as bankruptcies begin to mount, investors have been placing bets on the companies they believe will survive.

Diane Jaffee, a portfolio manager with TCW, added that the vaccine had changed the outlook for both sectors as well as the potential for the economy. Still, she added the drop in the share prices of businesses that announced new funding plans showed investors were not entirely "sipping it up".

Written by: Eric Platt, David Carnevali, Claire Bushey, Alice Hancock and Robert Smith

© Financial Times