Abu Dhabi studies restructuring options for $1.2bn Etihad-linked bonds

The government of Abu Dhabi is looking at proposals to restructure some $1.2bn of troubled bonds that were issued by Abu Dhabi state-owned carrier Etihad Airways in partnership with other airlines, sources familiar with the matter said.

Etihad issued $700m of bonds through a special purpose vehicle (SPV) called Equity Alliance Partners (EAP) in 2015, and $500m in 2016. Proceeds of the paper went to Etihad and other airlines it partially owned at the time, including Alitalia and Air Berlin, which are now both insolvent.

The notes were seen as strengthening Etihad’s partnerships with those airlines after it spent billions of dollars in acquisitions.

The EAP bonds have been trading at a significant discount for over a year, however, after Alitalia entered special administration and Air Berlin filed for bankruptcy.

Etihad has no legal responsibility to bail out the portion of the bonds which benefited the two European airlines as the notes have no cross-default provision.

But with over $500m of the paper held by United Arab Emirates investors, it has asked the Abu Dhabi Department of Finance to find a way to reduce losses for investors and limit any damage to the reputation of the local debt market, sources familiar with the matter said.

The department is now working with a financial adviser to find restructuring solutions, said the sources. One option being discussed could involve adjusting the structure of the paper to obtain a better credit rating. Rating agency Fitch has been involved in some of the discussions, the sources said.

Etihad declined to comment while a spokesman for the Abu Dhabi Department of Finance did not respond to a request for comment. Fitch declined to comment.

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Any type of restructuring would require bondholders’ approval.

Etihad agreed to cover Alitalia’s portion of the debt, equivalent to around $230m, at maturity through an agreement between the airlines which was signed before Alitalia entered special administration. But Air Berlin’s portion, of roughly the same amount, has no such guarantee.

Read: Abu Dhabi’s Etihad scrambles to shore up $1.2bn bonds

Any intervention by the Abu Dhabi government, which could materialise before the end of this year, might see Abu Dhabi inject around $200-300m into the issuing vehicle, said the sources.

This amount would be applied towards a partial early redemption of the notes at a discount of around 15 per cent to par value for note holders seeking an early exit, the sources said. That would imply a write-off of Air Berlin’s obligation under the structure, while Alitalia’s debt would be honoured.

Creditors unwilling to exit at a discount might swap their notes into new instruments with a higher credit rating. The notes could feature a credit enhancement in the form of a guarantee of the obligations of Air Serbia and Air Seychelles, which are part of the borrowing structure, the sources said.

The first tranche of the notes, due 2020, is rated CC by Fitch, while the second tranche due 2021 is rated C.

With an Abu Dhabi intervention, the notes would become investment grade because of the oil-rich emirate’s strong credit profile, so any capital injection by the government could be partially offset by a reduction in interest payments.

Last month, the SPV said it received a bid of just over $4 million in cash for the debt obligations of Alitalia and Air Berlin across the two EAP bond tranches.

The bid included around $6m that would become payable to the SPV in case of recovery of an equivalent amount from the obligations, and a payment of 60 per cent of money recovered after a 35 per cent recovery threshold was reached.

The bid had an expiry date of August 31; the SPV asked the bidder to extend the deadline to give note holders time to review terms. Since then, the SPV has given no update on the bidding process.