Air Berlin's insolvency filing after minority shareholder Etihad Airways elected to stop funding the German carrier has caused its bonds to crash in secondary trading as investors scramble to offload the potentially bad paper.
Etihad Airways bonds issued through a special-purpose vehicle, EA Partners, have also traded badly since Air Berlin's filing, financial newswires report.
In the short term, Air Berlin bond investors will be looking to minimise any exposure to the beleaguered German airline. But the broader concern is whether, as a result of Air Berlin's collapsing bonds, investors will be scared off the issuer class altogether. That might affect the ability of other airlines to issue bonds at the cheap financing rates they have recently enjoyed.
SUPER HIGH YIELD
Air Berlin currently has eight bonds outstanding, its investor relations website indicates. These include a €225 million ($264 million) note due in 2018 with an 8.25% interest rate; a $132 million corporate bond at 6.875%, due in 2020; and a $99.5 million corporate bond at 6.75%, due in 2021.
The carrier also has €270 million outstanding across three convertible bonds.
One of the airline's bonds, a Swfr100 million ($103 million) note due in 2019 with a 5.625% coupon, illustrates just how negatively investors are viewing Air Berlin paper. The note was yielding over 200% in trading yesterday, according to Thomson Reuters Eikon data seen by FlightGlobal. Given that a bond's price and its yield have an inverse relationship, that super-high yield implies that paper is now essentially worthless in investors' eyes.
The note in question was part of a dual issue with a €170 million euro bond carrying an annual interest rate of 6.75%.
While bond investors are now struggling to offload Air Berlin paper at acceptable prices, other market observers are not surprised by this turn of events.
"The 8.25% April 2018 bonds were trading at par as recently as May this year," one airline equity analyst tells FlightGlobal. "Okay, with a chunky coupon, par was already pricing in some risk, but any idiot should have known that Air Berlin was only operating because Etihad was bankrolling it. The latter pulling support for Alitalia should have been a bit of a warning sign."
Flight Ascend Consultancy's chief economist Peter Morris echoes that observation. "My reading of this is that it is a reworking of the standard caveat emptor so familiar for buyers of financial instruments."
Morris adds: "The point is, I think, that we would have advised caution five years years ago, four years ago, three years ago, and so on. Investors can, we believe, guard themselves against many of such 'surprises', if they carry out the appropriate due diligence."
WIDER IMPACTS
Recently, the bond markets have offered airlines a cheap and effective way to raise capital.
For example, EasyJet priced a €500 million seven-year note at 1.125% in October 2016.
Ryanair has also been very active in the bond market, in February issuing a 6.5-year €750 million eurobond on the Irish Stock Exchange rated "BBB+" by both S&P Global and Fitch Ratings, with a fixed coupon of 1.125%.
"This low-cost finance will enable us to further reduce our aircraft ownership costs while continuing to offer the lowest fares and best customer service through our Always Getting Better programme as we grow to 200 million customers per annum by 2024," stated the airline's finance chief Neil Sorahan at the time.
In March, Finnair raised €200 million through a five-year issue at 2.25%, albeit issued slightly below par at 99.925%, implying a higher current yield compared with the coupon.
Will Air Berlin’s bond crisis mean that these kinds of deals are no longer achievable?
THE WEAK AND THE STRONG
In terms of secondary market bond activity, airline bonds will suffer as an asset class temporarily, a bond market trader tells FlightGlobal.
"It's a good time to be short most carriers' bonds," says the trader.
However, in terms of airlines being able to issue new primary bonds, the equity analyst thinks the impact may even be a positive for some.
"I think the strong, well-managed and well-capitalised airlines will not have any problem. The likes of Ryanair and EasyJet also benefit from weaker competitors actually disappearing from the scene. Although Air Berlin alone will make little difference, it is the cumulative effect. The more marginal credits may struggle," the analyst says.
So, Air Berlin's nosediving bond prices may in fact strengthen stronger credits, such as Ryanair and EasyJet, in their ability to tap bond markets at competitive rates in the future.
However, airlines with weak balance sheets will likely have to either accept higher bond pricing or turn to other financing sources such as commercial bank debt.
Source: Cirium Dashboard
