Etihad Airways was looking to purchase a 24% equity stake in India’s largest airline, Jet Airways. As part of this larger equity investment and commercial partnership Etihad wished to provide funding for its new partner, which became its challenge. The investment was to be broken up between equity and debt so the team therefore had to develop a structure which would provide acceptable security to Etihad Airways. It was also faced with the challenge of structuring a deal which would be acceptable under both international and Indian regulations – a first.
To overcome this challenge, Etihad established a sale and leaseback transaction which provided $70m worth of asset-backed funding to Jet Airways. This unlocked liquidity from an unusual asset on the Jet Airways balance sheet, namely three pairs of take-off and landing slots at London Heathrow airport, which were owned and operated by Jet Airways. For Etihad, the slots were the clearest items of security on the Jet Airways balance sheet, which Etihad could use should it take ownership of the company. Jet Airways would continue to operate flights from these slots, which now belong to Etihad.
Key terms and participants in the transaction were:
Lender/lessor: Etihad Airways
Borrower/lessee: Jet Airways
Term: Five years
Asset: Three pairs of take-off and landing slots at Heathrow airport
Lenders Legal Counsel: DLA Piper
“We had previously spent a lot of time developing the structure of the deal for another investment which wasn’t realised. This provided a dress rehearsal and we were confident it would work. Therefore, when the Jet investment began to happen, it was clear that this solution should be taken off the shelf and used,” says Ricky Thirion, Group Treasurer.
Due to the nature and geography of the deal the Etihad team overcame some complexity and obstacles faced in executing this transaction, which included:
Perfecting the security under both English and Indian law, using both English and Indian powers of attorney. This was to ensure the slots would be transferred back to Etihad in the event of a default.
Obtaining approval from the Reserve Bank of India which was required on a unique asset-type and transaction structure such as this.
Overcoming the challenge of being of being the first to attempt this in the country, as India had only recently opened its aviation industry up to foreign investment. Etihad and its legal team therefore had to navigate through the new market and learn as it went along.
Best practice and innovation
The transaction creates an asset-backed lending solution between two corporate entities who are also commercial partners and provides innovative security to the lender in a structure that has not been executed before for this type of asset. No bank or other third-party debt was sourced into the transaction. The transaction also leveraged the unique position of the airline as a lender to unlock the value in the assets which would not be valuable security to traditional lenders.
The use of London Heathrow take-off and landing slots as an underlying security to support a lending transaction between two airline partners was a unique solution and no precedent transactions of this nature existed. Also, despite the unique nature of the deal, it was completed in a short time frame of just three months.
“The structure provides Etihad with security and sufficient control over the security in the event of a default. The security is also a very useful asset to Etihad Airways in the unforeseen event that it ultimately needs to enforce,” explains Thirion.
This entry was submitted under the Best Financing Solution category. However, our judges felt that because of the most innovative nature, in terms of securing take-off and landing slots at LHR as the underlying security to the transaction, it was a most deserving winner of the Judges’ Choice in this year’s awards. Perhaps this will create a precedent for deals of a similar nature in future.