Abu Dhabi’s Etihad agreed to repay Alitalia’s portion of two bonds

Etihad and its partner airlines issued the bonds worth a combined $1.2bn in 2015 and 2016



Etihad Airways agreed at the end of last year to repay a portion of two bonds maturing in 2020 and 2021 on behalf of Alitalia if the Italian airline ends up defaulting, two sources familiar with the situation said on Monday.

Etihad and a number of airlines in which it has equity stakes issued the bonds worth a combined $1.2bn in 2015 and 2016 via a special purpose vehicle (SPV) known as EA Partners.

Alitalia’s exposure to EA Partners corresponds to roughly 19 per cent of the $700m 2020 bond and about 20 per cent of the 2021 bond, or about $235m of the overall principal.

The sources were confirming an agreement first reported by ratings agency Fitch on May 3, the day after Alitalia asked the Italian government to put it under administration. The airline had debts of about 3bn euros ($3.3bn) at the end of February.

Etihad, which has a 49 per cent stake in Alitalia, declined to comment on Monday about the debt assumption agreement. Alitalia did not immediately respond to a request for comment.

According to the Fitch note, in the case of a default by Alitalia on its debt, Etihad Investment Holding Company(EIHC) has agreed to repay the principal of Alitalia’s portion of the debt issued by EA Partners. Fitch also downgraded the bonds to CCC from B minus for the 2020 notes and B for the 2021 notes.

One of the sources familiar with the matter said Etihad had probably informed Fitch about the debt agreement to prevent the bonds from being downgraded further to DDD.

In a statement issued by the Irish stock exchange on Friday, EA Partners said it was not aware of the agreement between Alitalia and EIHC and had requested information from the relevant parties.

The bonds came under pressure in April when Alitalia workers rejected the company’s latest turnaround plan, a move that ultimately forced the Italian airline to file for bankruptcy on May 2 for the second time since 2008.

The Fitch note, however, sparked a rebound last week. The bonds had been trading in the low 90 cents to the dollar at the end of April but bounced almost 10 cents to par value after Fitch mentioned the “internal debt assumption” deal.

“Quite the roller coaster,” said an investment analyst at a hedge fund in London. “The most shocking part of it to be honest is Etihad not letting EA Partners know about its agreement with Alitalia.”

“If it was for the benefit of EA Partners, why didn’t they inform the SPV in December? In that way the bonds would have not gone down to the 90s when Alitalia rejected the turnaround plan,” the analyst said.

The debt agreement means that “bond holders will have little incentive to accelerate Alitalia’s debt in the event of a default,” said JP Morgan in a research note published last week following the Fitch note.