Air Berlin : Let’s have a headache!

Air Berlin announced that it intends to: i/ invite holders of its existing 2019 CB (outstanding amount of EUR 140m) to exchange their bonds for new CBs (the exchange offer), and ii/ and raise an additional amount of up to EUR 85m from an offering of new CBs (the amount will depend on the tender and subscription rates). - To this effect Air Berlin intends to issue new convertible bonds guaranteed by Air Berlin PLC in an aggregate principal amount of up to EUR 125m due 6 March 2019 (same maturity as the existing CB) with a coupon of 8.50% (vs 6.0% for the existing CB) and a conversion price of EUR 1.15 (vs EUR 2.11; but the new CB will still be far out of the money with a current stock price of EUR 0.60). The investor put date on the new CB will be 29 December 2017 (vs 6 March 2017). The exchange offer ratio is 1:1. - Besides, Etihad will: i/ tender the EUR 40m of CBs it owns to the exchange offer, and ii/ enter into a total return swap with HSBC in respect of a proportion of the new CBs. - After a quick call with Air Berlin’s IR, we understand that all CB holders – including the ones who exercised the put – can tender theirs bonds to the exchange offer. We also understand that the new bonds will have a maximum amount of EUR 125m. If we deduct the EUR 40m that will be tendered by Etihad, there is EUR 85m left. These EUR 85m could either be: i/ other existing CB holders tendering their bonds to the exchange offer, and/or ii/ new money (which would not be exactly new money since it would be used, in our view, to repay the put for CB holders that exercised the option). - Air Berlin is, in our view, trying to save time by extending the put option by less than 10 months. Recall that the company is still waiting for the closing of the disposal of its Austrian subsidiary Niki to Etihad for EUR 300m, which could explain this liability management operation. Besides, as at end-September 2016, the cash position was EUR 261m, of which EUR 114m was restricted cash (not to mention the cash the company needs to run the business smoothly…). Lastly, saving time could also mean more time for Etihad to review its equity partnerships strategy (recall that that Etihad’s current CEO James Hogan will leave the company in H2-17) and/or to think about a more global deal implying Lufthansa (Ba1/BBB- neg outlook) as reported by the German press in several articles. - This potentially new Air Berlin’s CB offers a better carry (+2.5 points of coupon compared to the existing CB) in a CB universe where instruments offering attractive yields are very rare. However, we do not know what could happen before December 2017 (the date of the put of the new CB)? Will Etihad still continue to support the company and its creditors? The fact that Etihad tenders its EUR 40m of CBs and agreed on a total return swap is positive but it does mean that the company cannot go bankrupt in the future in our view. Note indeed that there are different types of total return swaps: with recourse (Etihad still bears the credit risk) or with limited recourse/without recourse (HSBC bears part or all of the credit risk). Besides, it is not clearly mentioned in the press release if, in parallel to this total return swap, HSBC will underwrite the placement of the new 2019 CB (the remaining EUR 85m after deducting the EUR 40m tendered by Etihad). But we can assume that HSBC would subscribe, at issuance, an amount of CBs equivalent to the notional amount of the total return swap. Lastly, we have no idea of the notional amount of the swap (it is not mentioned in the press release). And this will also depend on the amount of CBs that will be tendered. It would have been definitely better for bondholders, in our view, to see Etihad fully underwriting part of the placement of the new CB… - For all these reasons/uncertainties, we maintain our Reduce recommendation on the name. And for those who are invested in the CB, we recommend exercising the March 2017 investor put. This liability management operation reassures us on the fact that this put would be honoured by the company. - >