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June 26, 2013 4:36 pm
British Airways on Wednesday launched its first hybrid bond to help pay for the planned overhaul of the UK flag carrier’s ageing fleet.
BA, part of International Airlines Group, raised $927m by issuing Enhanced Equipment Trust Certificates – a type of corporate bond where aircraft are pledged as collateral – and will use the proceeds to finance the purchase of 14 new aircraft, including six Boeing Dreamliners.
The bond issue came as Bankia, the nationalised Spanish bank that is IAG’s largest shareholder, moved to sell its 12.1 per cent stake to institutional investors.
Experts said BA’s first use of EETCs highlighted the increasing importance of this type of aircraft financing after several European banks responded to the global financial crisis by reducing their role in providing loans to airlines to buy passenger jets.
US airlines have been frequent issuers of EETCs for many years, but carriers elsewhere in the world are now starting to follow suit, including last year Dubai-based Emirates Airline, the world’s largest operator of the Airbus A380 superjumbo.
Enrique Dupuy, finance director at IAG, said: “This transaction marks a strategic milestone as we diversify our sources of funding. It is also the first time that British Airways has used EETCs and that this form of financing has been used in the UK.”
BA’s EETCs are split into two tranches, carrying annual coupons of 4.6 per cent and 5.6 per cent and maturing in 2024 and 2020 respectively.
Analysts said the airline might have obtained cheaper financing with bank loans, but this debt is likely to have matured sooner than the EETCs and given it less flexibility.
Mark Simmons, of Spectrum Capital, which specialises in arranging aircraft financing, said: “It is harder today to obtain bank financing to purchase aircraft compared to before the global financial crisis. British Airways’ move into the EETC market highlights how this is one of the few alternative places to get these funds.”
BA is using the funds raised through the EETCs to finance the purchase of eight long-range Boeing jets – six Dreamliners and two 777-300 ERs – and six Airbus A320 short-haul aircraft.
BA’s first two Dreamliners, which are expected to arrive at Heathrow this week, are a central part of the fleet overhaul, together with its planned use of the A380, the first of which arrives next month.
Citi advised British Airways on its EETC transaction.
Bankia is using Bank of America Merrill Lynch and its own brokerage to sell its IAG stake, which at Wednesday’s closing price was worth £593m.
Bankia succumbed to the largest bank rescue in Spanish history after last year being overburdened by bad property loans and has been forced to sell stakes in IAG and other companies by the European Commission in return for accepting state aid.
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