Insight & Analysis

UK Export Finance helps sustainability-linked loan take-off

Published: Apr 2023

The treasury team at Turkish airline Pegasus have played a key role in securing a unique financing deal.

These are challenging times for the airline industry. PwC’s 2023 aviation industry review and outlook notes uncertainty has always made financiers and investors nervous and the continued conflict between Russia and Ukraine – plus growing Chinese militarism in the sea and air around Taiwan – suggests that much of 2023 will continue to be overshadowed by uncertainty.

For the majority of the industry, a long period of balance sheet repair lies ahead, including network, fleet and financial restructuring. The International Air Transport Association (IATA) forecasts Asian and Latin American markets will be unprofitable this year and Europe will barely break even.

With more lenders taking ESG considerations into their funding decisions, it was surprising that the number of green financing transactions closing in 2022 remained in single digits. However, the deals that did close encompassed a broad scope of transactions, including sustainability-linked loans.

In January, Pegasus Airlines closed the first ever sustainability-linked, aircraft-secured term loan – guaranteed by UK Export Finance – for the financing of ten new Airbus A321neo aircraft. The transaction was led by Société Générale, acting as global arranger, sustainability structurer, facility agent and security trustee.

“As far as we know, this sustainability-linked loan is not only the first export credit agency-backed aircraft financing structure in the world, but also the first deal approved by an independent party,” explains Barbaros Kubatoğlu, Chief Financial Officer (CFO)

The structure provides cost benefits by introducing a margin discount on the transaction upfront. As the transaction was export credit agency-guaranteed financing, the airline was required to demonstrate the objectivity and ambition of its sustainability targets.

The terms of the financing are indexed on the company’s future achievements in respect of two key performance indicators: carbon intensity of flights, and gender diversity in management positions.

The airline (which employs almost 6900 staff) aims to increase its total capacity by approximately 20% in 2023.

Its treasury team comprises nine people who manage over 400 accounts in 30 different currencies across more than 50 banks.

“Our commercial objectives are to manage the cash flow of the company effectively, ensure availability of funding sources, identify and manage the financial risks that could impact the company’s business performance, and overcome those risks by utilising available financial products including derivatives,” says Kubatoğlu.

His priorities as CFO include managing financial risks from fuel price volatility to interest rate hikes as well as potential risks such as currency devaluations.

“As always, our equity and debt investors are at the forefront of our priorities,” he says. “Sustainability, digitisation, and data security have also become a priority. We ensure the company’s sustainability initiatives are aligned with the overall business strategy and financial goals.”

Pegasus uses ERP integrated software solutions that also use artificial intelligence to make mid and long-term cash flow predictions and track revenue, for both currency and commodity risk management and to track investments in different financial instruments.

The airline’s treasury management processes have been significantly transformed since the start of the pandemic. “As well as analysing and implementing new financial products to better manage our financial risks, as the global economy entered a highly volatile and complex environment we started digitisation projects in every aspect of our treasury operations,” says Kubatoğlu.

“We also believe in the diversification of financing resources for the jurisdictions we operate in,” he adds. “Given the new regulations applied on the banking system, we believe sustainability-linked financing structures may become mandatory, rather than a ‘good to have’ side benefit in the long term.”

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