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The challenge

COVID-19 presented unprecedented challenges for the airline industry. Following curbs on air travel and tighter border restrictions, Qantas was forced to ground most of its aircraft and stand down 20,000 employees.

In March 2020, Qantas became the first airline in the early days of the COVID-19 crisis to successfully raise AU$1.05bn at a rate of 2.75% of ten-year financing against seven Boeing 787-9 aircraft. This was followed by another AU$550m in May 2020 against a further three aircraft with no financial covenants on any existing or new debt facilities and no significant debt maturities until June 2021. By June 2020, against a backdrop of a AU$2.7bn net loss for the year Qantas announced various cost saving measures, which included regrettable job losses.

With continued border closures, and with domestic capacity below 20% in the first quarter of FY 2021; Qantas had to find other ways to continue strengthening its liquidity and replace maturing debt.

The solution

Between June and November 2020, Qantas’ treasury team commenced various fundraising exercises to strengthen its balance sheet and to shore up liquidity, raising AU$715m, including AUS$400m to refinance a bond maturing in June 2021. There were plans to also increase the size of its existing AU$1bn revolving credit facility (RCF) by an additional AU$500m before December 31st 2020, to provide additional standby liquidity, bringing the total group available liquidity to AU$4.2bn, made up in cash and undrawn RCF.

Apart from tapping the bond market as well as existing bank relationships, Qantas also looked at payments already made and future payments due to see if there were any contracts where export credit agencies (ECAs) may be tapped for finance. One such contract was for the purchase of engines from GE with delivery dates between December 2019 and December 2020.

Qantas started discussions with GE on potentially accessing the guaranteed financing of the Export-Import Bank of the United States (EXIM). Qantas was seeking to finance up to 85% of the contract value related to the engines, which would enable Qantas to finance certain upcoming payments as well as seek reimbursements of payments that had already been made.

“Our aim was to secure local currency financing to minimise FX exposure, and to have the financing in place before the end of the year; however, we were unable to receive the final approval for the EXIM financing until early 2021, and would miss the December 31st deadline,” explains Greg Manning, Group Treasurer.

To address this, J.P. Morgan proposed to bridge the gap between Qantas’ immediate financing needs and EXIM’s expected approval, by structuring a three-month bridging facility. One key requirement of Qantas was to document the facility in such a way that upon obtaining full EXIM approval, it could be seamlessly converted into a long-term facility with a 100% EXIM guarantee (the EXIM Facility), which was ultimately achieved.

Best practice and innovation

This is the first long-term aviation transaction undertaken with EXIM support in Asia Pacific. Open channels of communication and round-the-clock deal team coverage across the parties were key to getting this transaction over the line.

Key benefits

• Reduced refinancing and FX exposure risk.
• Delivered in record time.

“With our bank’s support, we were able to secure the EXIM funding by structuring an innovative bridging facility that eventually converted into the EXIM’s long-term facility seamlessly, providing us with the necessary funding that eliminates both refinancing and FX exposure risks, within the tight time frame,” says Manning.