Structured solution
In mid-September, Etihad Airways, its airport services business and five of its key strategic partners printed a US$500m five-year deal that stunned the market.
The highly complex trade got done at a time when the only emerging markets issuers to have access to the US dollar market were credits such as Kexim and ICBC because of the rough conditions.
The bond then went on to perform strongly in the secondary market. “It’s rallying quite a bit. I don’t think that was expected by anyone in this market,” said one rival syndicate official at the time.
The bond is still trading 2.5 points above its par reoffer price, while many other new issues are under water.
Much of the credit should go to Etihad’s management, which as well as undertaking a formal roadshow in the run up to the deal, did pre-marketing with investors in June in Abu Dhabi and Europe.
That work helped generate anchor orders and gave confidence that a deal could work even against a difficult backdrop.
The transaction was issued by EA Partners, a newly-created SPV, with the proceeds used to enter into debt obligations with the entities involved – Etihad Airways, its subsidiary, Etihad Airport Services, Alitalia, Air Berlin, Jet Airways, Air Serbia and Air Seychelles.
The investments that Etihad has made in these airlines are critical to its profits and growth. The Etihad Partners group delivered 47% of total cooperation revenue in 2014, up from 44% in 2013, according to the bond’s prospectus.
The proceeds from the deal represented separate debt obligations of each partner of up to 18.85% of the total amount raised for Etihad Airways, Alitalia and Air Berlin, 16.15% for Jet Airways and Etihad Airport Services, 8.08% for Air Serbia and 3.08% for Air Seychelles.
There is no cross-default provision and none of the partners are legally obliged to support each other in the event of one of them defaulting, but there are certain protective features. These included a liquidity pool – in effect a first-loss piece – which grows over the life of the bond but at issuance is 4.75% of the amount raised.*
Although the bond was rated B minus, reflecting the ratings of the obligors with the weakest credit quality, the blended rating was more like Double B.
That, together with the work undertaken by Etihad’s management, meant the bond was priced at a much lower yield than Single B issuers. It came 12.5bp inside initial price thoughts of 7% area. Buyers included emerging market investors and high-yield accounts.
The aim was to ensure a deal that would allow further issuance from the group. The point was reinforced when the bond was tapped at the same yield two days later following reverse enquiry, adding US$200m to the size.
ADS Securities, Anoa Capital and Goldman Sachs were the lead managers.
* amends details on the liquidity pool
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