Despite public bank loan proposal, Azul announces $ 283 million debenture issue – AirlineGeeks.com

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Despite Public Bank’s Loan Proposal, Azul Announces $ 283 Million Debentures Issue

As the Brazilian airline industry quickly recovers from 2019 traffic numbers and April’s historic lows look like a small shape in the rearview mirror, airlines are redefining their strategies to secure the future that lies ahead. On Monday, Azul Linhas Aéreas announced a big step in this direction by submitting to the Securities and Exchange Commission (CVM) of Brazil a request for convertible bonds worth 1.6 billion Brazilian reais (283.4 million dollars as of October 10).

The offer, which can be increased by 20%, has two hedge funds as lead investors: Knighthead Capital Management and Certares Management, which plan to place an order of between BRL 1.6 and 1.8 billion, which, in practice, could cover the full expected value of the transaction, even if the market shows no interest in the offer. Investors have also pledged to place an order of around BRL 560 million if Azul makes a similar offer within the next 12 months.

Azul also informed that the number of bonds can be increased by 20%, with a maturity of five years, indexation to the US dollar and an interest of 7.5% in the first year with semi-annual payments, with a rate of 6% the following years. . The papers will also be convertible, depending on the value of Azul’s shares on the São Paulo Stock Exchange, which is expected to be determined during the book constitution procedures.

In addition, along with Delta and United Airlines in the United States, Azul will use its loyalty program, TudoAzul, as a guarantee for the operation. The airline will also mortgage the rights to use its hangar in its main Viracopos hub, as well as its own intellectual property rights. Azul expects the debentures to be liquidated by November 12.

One question that arises is why Azul, Brazil’s third-largest airline by domestic traffic before the COVID-19 pandemic, opted for an entirely private solution when a bailout run by the Brazilian National Bank for the economy and the social Development has been under discussion since March.

Although the basic draft of the bailout has apparently been available to airlines since August, the package has been openly criticized by airline executives. In early August, Azul CEO John Rodgerson said Véja magazine “I take offense when people use the term ‘BNDES rescue’ because it’s not a rescue, it’s a very expensive thing and it generates a huge return for the Brazilian government, so I don’t don’t like it [people] call it a rescue because it isn’t.

An Azul Embraer 190 lands in Campinas. (Photo: AirlineGeeks | João Machado)

Indeed, the terms of the package – which would mix public and private funds, all at market prices – worried airline executives. An anonymous senior executive from LATAM Brasil told this week’s issue of the business magazine IstoÉ Dinheiro this “[the bailout] is like a worker who takes out a loan that cannot be used to buy a car, a house, a supermarket [shopping], vacation, travel, no debt settlement ”, adding“ the impression is that the rules were created to make loans unsustainable ”.

The wait for the BNDES package was precisely why LATAM Airlines Group excluded LATAM Brasil from the Chapter 11 process in May. However, the long wait for a definition was the reason why the Brazilian branch was added to the procedure less than two months later.

Paradoxically, the lack of a rapid injection of liquidity for Brazilian airlines was a double-edged sword, as it allowed a complete reshuffle of agreements with lessors, creditors and suppliers, thus giving the companies some leverage on the market. long term.

“I had to renegotiate everything,” Azul CEO John Rodgerson told NeoFeed Last week. “Imagine if BNDES had arrived with BRL 2 billion in our treasury in April. I would have burned a good part of it, because everyone would have wanted to put their hands in the money. The fact that it was slow helped show vendors that the money wasn’t coming in and a renegotiation was needed.

However, nothing from the BNDES project was ruled out. Estado de São Paulo newspaper reports that “the proposal of this hybrid instrument”, avoiding weighing everything in shares and too diluting the current shareholders, while also avoiding too much debt and stifling the depreciation charges of the airline, ” is part of the project developed by the BNDES ”.

that of Istoe the article states that, among the package’s demands, “the most controversial is that the resources cannot be used for debt payment or for the purchase of planes, two of the most important weighing on the accounts of the companies aerial ‘; Azul’s filing with the Brazilian CVM, which indicates where the financing provided by these bond issues will go, shows precisely this dissatisfaction.

Of the net BRL 1.586 billion the airline expects to raise, 65% will go to working capital, but 35% (BRL 555.28 million) would go to “the expansion of logistics and business. other strategic opportunities “.

Azul’s treasury is already relatively strong – at NeoFeed, Rodgerson said the airline has BRL 2.3 billion in cash, a position he said could keep the airline afloat for 30 months. From an industry perspective, airlines in Brazil are constantly reducing their daily cash consumption and securing funding to survive. Mark.

And Azul has a lot of niches to explore, especially when it comes to freight. Its freight arm, Azul Cargo Express, has deals with huge e-commerce companies, like Mercado Livre, and is growing year by year, even with COVID. For example, after removing all seats from an Embraer 195 for cargo operations, Azul plans to have four all-cargo E-Jets by the end of the year.

“Now it’s [about] recovery, recovery and recovery, ”said the always optimistic Rodgerson at NeoFeed. “His [about] stop crying, [we] we must look ahead. The only way to save ourselves is to fly.

Azul CEO John Rodgerson on delivery of Azul’s first E195-E2. (Photo: AirlineGeeks | João Machado)

With a lighter structure brought about by the disastrous adjustments, the aviation recovery in Brazil looks better than expected a few months ago – at least at the national level. In November, Azul plans to fly 80% of its 2019 capacity, and other major airlines are following this uptrend as a result, with demand heavily biased towards leisure. Airlines are hoping that once corporate traffic returns, especially after a vaccine, a healthy market environment can follow.

In that sense, Azul and LATAM Brasil also have a lot to look forward to, with the codeshare agreement signed in June. With their very complementary networks, Azul strong on regional markets and LATAM strong on major routes, it will be a very positive legacy of this unforgettable year for the industry.

“If you see, Delta paid $ 2 billion to get into LATAM. The $ 2 billion turned to dust, but they paid it off in February of this year. Why did they pay? [Because] they only have 20 flights to Latin America and could connect with LATAM flights, ”Rodgerson said. “Now look at the Azul and LATAM code sharing, it’s really powerful. It will be the biggest codeshare in the world.

With the prospects for the COVID-19 vaccine on the horizon – Brazilian authorities say it is expected to start rolling out from January – real recovery may finally appear in the distance. With that, once the airlines have succeeded in eliminating the daily consumption of cash, the funding needed to stimulate investment and growth will be strategic to see who has the advantage in leaving these nightmarish times. In Brazil, Azul and LATAM seem more comfortable on this aspect.

  • João has loved flying since he was six when he started visiting his home airport in Porto Alegre, in southern Brazil. As he always liked to write, in 2011, at the age of 10, he created his own blog on aviation. A lot has happened since then, and now he is putting all his efforts into becoming an airline executive in the future.

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João Machado
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