IAG shares slip on need to strengthen financial buffers

Airline group has announced plans to raise a further €1.2bn through a bond issue
IAG shares slip on need to strengthen financial buffers

Aer Lingus's parent has seen fit to further strengthen its finances.

Shares in Aer Lingus owner IAG slipped after the airline group announced plans to raise a further €1.2bn, through a bond issue, in a bid to cement its survival should the Covid-driven international travel downturn last longer than expected.

IAG also owns British Airways and Spanish carriers Iberia, Vueling, and Air Europa. 

Last month the group said it has sufficient liquidity to ride out the crisis.

However, it has now decided to add to its war chest.

IAG’s shares closed slightly down, having dropped by as much as 2% at one point.

Airlines are counting on a summer travel reboot after a year of minimal income due to coronavirus restrictions, but rising case numbers in some countries and delays to the vaccine rollout in Europe could derail the recovery.

IAG said the proceeds from the bonds could be used to withstand a more prolonged downturn or provide “flexibility to take advantage of a recovery in demand for air travel”.

The group, which is burning through about €185m per week as a result of the pandemic, has been cutting costs while flying only 20% of its normal capacity.

It said the senior unsecured bonds would be issued in two tranches, with €500m in 2025 and €700m due in 2029. The bonds will bear a fixed rate of interest of 2.75% and 3.75%.

In a low-rate environment and with economies set to reopen, bond investors have become increasingly keen to buy debt from well-known airlines, as it is one of the few sectors still offering a high yield.

Although IAG lost its investment-grade rating last year after the pandemic wreaked havoc on airlines, progress on Covid vaccinations has led investors to revisit the sector.

The EU has also, this week, announced plans for a common Covid travel certificate which could allow EU residents to travel around the region by this summer.

“Airlines is one of the few corners of the bond market still offering some juice,” said a source. 

“With international travel expected to reopen this year, investors feel comfortable owning this debt.” 

Lufthansa and EasyJet have already tapped bond markets in recent months, with the German airline repaying a big portion of a government bailout after its latest €1.6bn debt sale and EasyJet raising €1.2bn in February.

IAG has current liquidity of over €10bn, having raised €2.7bn in a rights issue in October and having €2bn worth of loan guarantees from the British government available to it.

In addition, Aer Lingus recently received a three-year €150m loan from the Government’s Ireland Strategic Investment Fund. To date, it has drawn down half of that amount.

Last month, IAG posted an annual loss of just under €7bn and saw revenues sink by nearly 70%. 

Aer Lingus’ revenues slumped by €1.6bn to just €467m last year, while it posted an operating loss of €563m.

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