United Airlines Sees Weak Demand for $2.25 Billion Junk Bond

United Airlines Holdings Inc.’s junk-bond sale is struggling to gain traction with investors as orders of just $1.5 billion were placed for the $2.25 billion offering by Thursday morning, according to people familiar with the matter.

Pricing discussions on the debt were initially in the range of a low 9% yield across both parts—a $1 billion three-year tranche, and a $1.25 billion five-year portion. Those yields may rise, said the people, who asked not to be identified discussing a private transaction.

Investors have so far proven eager to lend to companies that have been hit hard by the coronavirus pandemic. But the pushback on United’s deal suggests they still have their limits, and may be reluctant to jump in without the double-digit yields and iron-clad collateral seen in previous offerings.

Shares of United pared gains after Bloomberg reported on the offering, trading as low as $23.22, from around $23.95 earlier.

JPMorgan Chase & Co, which is leading the deal, declined to comment. Representatives for United didn’t immediately comment.

The notes are secured on a first priority basis by a pool of 360 aircraft owned by United. Some investors are concerned that these are not valuable enough to balance out the risk of investing in an airline whose business has been hit as governments across the globe have halted travel to help stem the spread of the new coronavirus.

“This is a good example of a firm being creative in financing unencumbered assets,” said John McClain, a money manager at Diamond Hill Capital Management. These are older assets that investors should be skeptical about financing, he added.

The aircraft are close to retirement with a weighted average age of 19 years, according to CreditSights analyst Roger King in a note published Wednesday. That means many of the planes will not be flying when the five-year bond matures, he wrote.

United is taking advantage of a reopening junk-bond market to borrow, with the intention of using proceeds from the sale to pay down a $2 billion one-year loan it arranged with banks in March, a portion of which was bought by Apollo Global Management Inc. The lenders had a first priority claim on planes whose value exceeded the amount of the loan, according to a filing.

United raised about $4 billion of new liquidity through three new term loans, new aircraft financings, and an equity offering through April 29, bringing total liquidity to about $9.6 billion, according to the first quarter earnings release.

The company has used other collateral on bank loans to shore up cash. A $500 million loan was secured against spare parts, while a $250 million deal was secured by liens on spare engines.