Air Berlin : Auf Wiedersehen Etihad?

According to several articles published in the German press, Etihad plans: i/ to remove James Hogan as its CEO, and ii/ to review its strategy in Europe and sell its European holdings. Besides, after the announcement of the nomination of a new CEO at Air Berlin, a former executive at Lufthansa, the German press reported that Lufthansa is set to take over Air Berlin, but on a debt-free basis. Etihad is said to consider covering the debt accumulated by Air Berlin to then handing over the company. Etihad would also pay for a stake of at least 10% in Lufthansa as part of the deal. This structure would be close to that of IAG (the umbrella company of British Airways and IAG) which is 20% held by Qatar Airways. The financial implications of a potential exit from Air Berlin by Etihad are not clear at the moment… - We always highlighted the fact that the investment-case on Air Berlin was 100%-dependent on the support by Etihad since, with an adjusted leverage above 10x, Air Berlin is not a sustainable company on a stand-alone basis. So far, Etihad continued to grant funds to the company (notably through the guarantee on 2 new bank loans earlier this year, plus the more recent acquisition of Niki from Air Berlin for EUR 300m). A potential exit of Etihad would thus be a surprise to us. This would raise a lot of questions on the debt side: the worst-case scenario could be a debt restructuring at Air Berlin before Lufthansa takes control of the company (since the German press suggested that Lufthansa would like to take control of Air Berlin but only on a debt-free basis); a more positive scenario would be a guarantee given by Etihad on Air Berlin’s debt… But let’s reckon that things are more uncertain than ever now… - We had a Negative opinion on Air Berlin’s credit and a Reduce recommendation on the 2018 and 2019 straight bonds; we maintain these views. - We had a “Speculative” Buy recommendation on 2019 convertible bond 2017 put regarding the attractive discount vs the price of the investor put at par on 6 March 2017. However, in the light of the new uncertainties regarding the future of Air Berlin and the possibility of a debt restructuring, our investment-case on the CB should be put into question. This is all the truer as Etihad’s strategy could change before the put date in March (an article in the Arabian press evoked a change of CEO at Etihad within 3 months…). It is also true that the c. EUR 300m cash proceeds to be received from the disposal of the Austrian subsidiary Niki by Air Berlin could help to improve the liquidity position regarding the put, but we do not know again if the shift of Etihad’s strategy would be implemented before or after the put… - We therefore downgrade our recommendation to Reduce vs “Speculative” Buy on Air Berlin 2019 CB 2017 put. Note that we recommended to Buy this instrument in early May 2016 when it was trading at a cash price of c. 72% (ask price), while it is now worth c. 85% (bid price), implying an increase of c. +13 figures. - >