A special purpose vehicle linked to Etihad Airways is poised to auction its claims on insolvent partner airlines Air Berlin and Alitalia, in order to head off the risk of defaulting on bonds it sold.
A cash reserve that covers interest payments on bonds issued by EA Partners II has run low following the insolvency of two of the six Etihad affiliates it was set up to fund. EA Partners II, which sold $500mn notes due in June 2021, said last week that a “remarketing event” occurred on the debt, according to a statement. This is triggered when the pool falls below 75% of the initial reserves, according to bond documents.
An official at EA Partners in Amsterdam declined to comment on the statement. An Etihad official in Abu Dhabi declined to comment.
Etihad created EA Partners I and II to provide financing to carriers in which it held stakes without weighing on the balance sheet of the Abu Dhabi-based parent company. Their structure is similar to that of securitisations whereby they issue bonds secured by the individual obligations of the affiliate companies. The auction will apply only to claims on the two insolvent airlines, according to bond documents. However, if bids don’t cover the shortfall it could trigger a default on the EA Partners bond, at the discretion of bondholders, according to a Fitch Ratings report.
“If the remarketing of the debt obligation is not sufficient, along with the liquidity pool, to cover the partial redemption of the notes at par and accrued interest, or without support from Etihad, an event of default could occur,” said Tony Lebon, a credit analyst at Oddo BHF in Paris. “Then, a bondholders meeting would be called and several options could be on the table, including an acceleration of the notes.”
It may take until late August to determine whether a default on the notes has occurred if the remarketing process is unsuccessful, according to Arndt Muthreich, a managing director at Stifel Nicolaus. In that scenario, the EA Partners II bonds may be worth between 56.2 cents on the dollar and 80.4 cents, he wrote in a note to clients.
EA Partners I and II notes are quoted at 74 cents on the dollar and 71 cents respectively, according to data compiled by Bloomberg.
EA Partners will have to appoint a new agent for the auction after Dare Holdings, formerly Anoa Capital, requested the termination of its contract, EA Partners said in the statement last week. No “remarketing event” occurred on $700mn of EA Partners I notes due in 2020, the company said in a separate statement.
In May, Etihad said it would assume Alitalia’s obligation to pay the principal on its debt to EA Partners, but not interest.