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Counting the cost of Alitalia’s demise

Analysts have begun trying to pick out the best and worst case scenarios for bondholders and creditors to Alitalia. EA Partners I’s 6.875% senior notes due 2020 (offered at 92, yield of 9.8%) and EA Partners II’s (EAP-II) 6.75% senior notes due 2021 (offered at 90.5, yield of 9.7%) issued by Etihad Airways and its equity partners – Etihad Airport Services, airberlin, Air Serbia, Air Seychelles and Alitalia – last year may not be too adversely affected, according to a note from JPMorgan Securities, and the sell-off in the bonds prompted by Alitalia entering administration may even have created an attractive entry point, the research note says. Etihad will likely support these structures in the future and Alitalia’s exposure is low at $232 million across both bonds. In the best case scenario, with Etihad support, the bonds could trade between high 90s and 105+ says JPMorgan. However, if the worst case scenario occurs, where Etihad extends no support and the bonds go into default, JPMorgan predicts that the bonds could still recover at 87 for EAP-I and 83 for EAP-II. The analysts make a compelling case for Etihad’s continued support of the bonds despite management already ruling out further support for Alitalia because the tight pricing of the bonds means that Etihad support was factored into EAP I and II, and it will be in the interest of the Abu Dhabi state for this to be proven correct if Abu Dhabi GREs want to continue to raise significant amounts of debt at attractive levels.

JPMorgan has also stated that the Etihad equity alliance will continue especially since the airline has reiterated its support for Air Berlin (including a new €350 million loan).

The debate over these bonds will continue for some time since, aided by a bridge loan form the Italian government, Alitalia is able to meet its debt obligations until September 2019 for EA Partners I and Jun 2019 for EA Partners II, when the pool balances will fall below predefined thresholds. If Alitalia does default on its debt obligations for these bonds, the issuer’s agent should in theory accelerate Alitalia’s Debt Obligations via a notice of acceleration to Alitalia, says the note from JPMorgan. If Alitalia is unable to repay, the issuer will apply the liquidity pool to settle the obligation, and if the amount in the pool is insufficient, initiate remarketing of the defaulted debt obligation. At this point, Alitalia’s defaulted debt obligations would be offered to investors including Etihad. JPMorgan analysts believe that this is the point when Etihad could show support for the notes by offering to pay a price that results in a par recovery of Alitalia’s obligations. The airline has not stated its intent in this regard anywhere in the bond prospectus.

Meanwhile, the aircraft leasing companies are counting their exposure to Alitalia, which appears to be minimal at least for the publicly-traded lessors. Air Lease Corporation’s direct exposure is limited to just five aircraft (4 widebodies), while AerCap has six A320s and one 777 with the Italian airline.

Date: May 4, 2017

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