Six airlines raised or committed to raise $4.2 billion in July to boost their liquidity. Contrast this with the prior six months when only two successfully raised capital for general corporate purposes. Why this sudden rush to the capital markets?
The need for capital is self-evident. Fifty airlines failed last year, IATA reports, and another 20 could collapse this year. Alan Joyce, Qantas chief executive, told a recent conference that airline conditions have stabilised since April, but the industry's short-term outlook remains "dire".For many carriers, liquidity is the chief worry.
Yet, as every chief financial officer knows, fresh capital has been as scarce as credit in a poker game. Banks have been preoccupied with toxic assets and stress tests; share marketsreeling from losse; and lenders pooked by almost any risk.
The first hint of recovery came in March, when Lufthansa ventured into the bond market with an offering of €850 million ($1.2 billion). Its financial advisers sensed the market was on the brink of a change and an offering by Europe's only investment-grade airline might work. It did;buyers over-subscribed the issue five times.At the same time, SAS offered an equity issue aimed at both existing and new shareholders. Over the next month it raised $883 million.
Despite these successes, capital markets were still slow to thaw.Corporate lending started opening up in Europe, but it took four more months to reach aviation.
At the start ofJuly Lufthansa again led the way with another over-subscribed bond issue. Within a matter of days, Air France-KLM followed with a sale of €661 million in convertible bonds. British Airways came next,saying it would issue £300 million ($493 million) in convertible debt and had gained access to much more from freed-up bank facilities.As July ended, capital raising had spread beyond Europe as Air Canada, Australia's Virgin Blue and Indian carrier Kingfisher outlined deals worth a further $1.2 billion.
The consensus among analysts about what triggered this change is that yield-hungry investors had little choice but to shift to corporate bonds because reserve banks around the world had lowered benchmark rates almost to zero and the US Fed was taking over more mortgages. Nothing else offered decent yields.
Airlines joined this rally late because they are still seen as risky. Spreads are coming down, but they remain high because investors are still skittish. Other factors play a role, but investor confidence is reflected in the rates that individual carriers have committed to pay. They range from highs of 12 and 13% for Air Canada and American's AMR, to half that much for Lufthansa, and only 4.9% for Air France-KLM.
July's capital rush has continued. Early in August AMR borrowed $276 million from private lenders and Avianca unveiled plans to offer bonds worth $250 million. More are likely to look to the markets to cover financing that banks no longer can meet.
Carriers have used a variety of tools.Lufthansa has sold straight bonds; AMR issued senior secured notes. Both are pure debt instruments. Three other airlines have sold convertible bonds or issued warrants convertible to shares. These represent a hopelenders will elect to swap debt for equity before loans mature.
Most carriers probably would prefer the route flown by SAS, Virgin Blue, All Nippon, AirAsia, Kingfisher, and Icelandair who have issued or plan to issue new shares. Equity offerings boost rather than burden balance sheets. Shareholders have a right to expect a return on their investment, but capital raised this way has the obvious advantage of not needing to be repaid.
The key to any equity offering is to convince existing shareholders either to participate in it or accept dilution of their shares as a result of it. AirAsia, Kingfisher, and Icelandair are in discussions with their shareholders about this now. Virgin Blue came to terms with its shareholders and the deal demonstrates the value of having their support. Not only has Richard Branson's Virgin Group agreed to participate in the share offering so that it retains its current 25.5% stake, but it also agreed to underwrite 20% of the public offering in case other investors do not take it up.
Brett Godfrey, who announced he will retire at the end of next year as Virgin Blue's chief executive, describes this exercise in terms that apply to most airlines. "The objective of this equity raising is to do nothing more than strengthen the balance sheet and provide us with some further liquidity," he says.
Lufthansa bonds €850 million ($1.2 billion)
SAS new share issue raises $883 million
Lufthansa bonds €750 million
Air France-KLM convertible bonds €661 million
BA to raise £600 million; half from convertible debt issue, balance from freed bank guarantees
Virgin Blue's new share issue to raise A$231m ($193m)
Air Canada borrows C$1 billion ($925m), offers lenders warrants for shares
Kingfisher plans share issue for 5 billion Indian rupees ($105 million)
ANA plans to raise ¥141.7 billion ($1.53 billion) from a share placement
AMR $276 million private placement of senior secured notes
AirAsia considers 20% share issue. No amount listed.
Avianca to offer $250 million in bonds
Icelandair plans $32 million share offering
For more on how the financing issues have impacted the aviation sector see:flightglobal.com/finance09