Photo of Ricky Thirion, Etihad Airways.

You may recall this company has won previously with a most innovative solution whereby it used landing rights at London’s Heathrow airport to secure finance. Well, this time it has managed to secure financing ($700,000 6.875% Notes due 2020) along with its equity partners (namely Alitalia, Air Berlin, JetAirways and Air Seychelles) for capital expenditure and investment in fleet as well as for refinancing depending on each airline’s needs.

The challenge

Etihad Airways PJSC and its subsidiary Etihad Aviation Services, together with equity partners Alitalia, Air Berlin, Jet Airways, Air Serbia and Air Seychelles, accessed the debt capital markets for a joint debt issuance rather than individual standalone tapping of the market.

Through the joint issuance, Etihad and equity partners aimed to achieve a sustainable presence in the capital market to secure cost effective funding and make Etihad Group’s endorsement of ‘shared vision’ visible to investors. The proceeds were for capital expenditure and investment in fleet, as well as for refinancing, depending on each airline’s individual needs.

The solution

A special purpose vehicle (SPV) issued $700m of five-year unsecured debt and on-lent the funds to each of the obligors. Each obligor pays a different rate of interest to the ‘issuer’ commensurate with its standalone credit rating, bringing the weighted average coupon, to note holders of the SPV at 6.875%. The solution is a diversified, rated, high-yield collateralised loan obligation (CLO) focusing on corporate loans with seven borrowers. Even though some of the obligors were weak credits, the loans are made to the obligors on an unsecured basis.

Given the cross-border nature of the funding, a significant amount of legal and tax structuring was needed to ensure full compliance with regulations. For instance, to deploy the proceeds to the respective equity partners, the SPV required loan and non-convertible debenture (NCD) structures, including Jet Airways in where currency hedging was also required.

Each airline obtained its own individual credit rating from Fitch. The overall rating for the transaction of B- was not determined by averaging the ratings of all the obligors involved, but instead was taken from the lowest-rated obligor using the weakest link methodology. The transaction was not cross-guaranteed, meaning that each airline was standing on its own feet from a risk perspective; although default by one could lead to a remarketing of all the loans.

Best practice and innovation

Even a highly diversified transaction of $700m is substantial in the CLO market. Furthermore, the structuring of a CLO against mainly an emerging market portfolio and in the airline sector had not been done before. The structure of the offering was therefore unique in both size and nature. Being the first ever such transaction, it required Etihad to educate global investors on the Etihad Partners ‘story’ and the sharing of its business strategies.

The pricing of the bond was tighter than B- pricing range and therefore accurately reflected the strategic linkage between the obligors and the combined strength. This could not be captured directly in the rating of the issuance, as it was purely based on the weakest rating in the link. Since launch, the notes have traded above par. Even during the general ‘risk-off’ situation in January 2016, the notes continued to trade above par.

The financing solution demonstrated the growing investor appetite for the pooled structure, providing yet another opportunity to tap the market at some stage in the future. A diversified book was built across regions all the way from the Middle East to Europe, and there was participation from UK, Italy, Germany and Switzerland. On the back of substantial reverse inquiries, the original $500m transaction was upsized to $700m two days post the pricing.

“This transaction marks Etihad Airways’ equity partners’ inaugural bond issuance,” says Group Treasurer Ricky Thirion. “The success of this transaction is a major endorsement of the shared vision and strategies of these businesses by the global financial community. The deal allowed Etihad to educate global investors on the Etihad Airways Partners’ story and strategy and has established our presence in the international capital markets.”

Key benefits

• The centralised funding vehicle enabled Etihad and its equity partners to efficiently access the capital markets in a sustainable, cost effective manner, and in a size that made it attractive to investors.
• The transaction made Etihad and equity partners’ ‘shared vision’ visible to investors.
  Etihad and its equity partners were able to raise the financing required for increased capital expenditure and investment in its fleet, as well as for refinancing of each individual airline depending on their needs.