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Aircastle and Delta issue senior notes and those UAE airline merger rumours

The hot bond markets have attracted two more companies to the market this week with lessor Aircastle issuing $500 million of senior notes and Delta Air Lines has returned to the market with a cool $2bn of three and five-year notes.

Aircastle’s $500 million of 4.125% senior notes due 2024, priced at par.  The aircraft leasing company plans to use the net proceeds of the offering for general corporate purposes, which may include the acquisition of aircraft or the refinancing of its existing indebtedness. The offering is expected to close on March 20, 2017.

Citigroup Global Markets, BNP Paribas Securities, Credit Agricole Securities (USA), Deutsche Bank Securities, Goldman Sachs, J.P. Morgan Securities, Mitsubishi UFJ Securities (USA) and RBC Capital Markets are acting as joint book-running managers for the offering.

Delta Air Lines priced two tranches of notes yesterday: $1bn three year notes due March, 2020; and $1bn of five year notes, due March 2022.

The three-year notes have a coupon of 2.875% with a spread to benchmark treasuries of +130 basis points (bps), priced at 99.721%. The five-year notes carry a coupon of 3.628% with a spread US treasuries of 1.875%, priced at 99.986%. Both tranches were rated Baa3 by Moody’s, BB+ by S&P and BBB- by Fitch.

Joint bookrunners on both deals are: Barclays, Goldman Sachs, JPMorgan, Citi, Credit Agricole Securities, Credit Suisse, Deutsche Bank, Merrill Lynch and US Bancorp. BNP Paribas, Guzman, Natixis, Williams Capital Group, UBS, and Wells Fargo are co-managers.

It was widely reported yesterday that the Emirs of the UAE have again discussed a potential tie-up between Etihad and Emirates. This discussion has been a more or less bi-annual fixture for the past decade. But now in 2017 there is significant merit to a merger between the two airlines: Both Etihad and Emirates are under significant strain; both airlines continue to grow rapidly, but at the same time yield is falling fast. For Emirates it means a possible further deferrals of deliveries and maybe even some cancellations and a real noticeable curbing of global expansion. For Etihad it means a complete revision of its business model of airline investments, which to date have cost it far more than it has gained in return, and then on top of this a slowing of growth.

So as both Etihad and Emirates move through a tough period does a tie-up of sorts make sense? Of course it does – Emirates is the more powerful brand but Etihad is the national carrier and so the best option is to forego the arguments and just simply concentrate on the route map of the two airlines and making sure that any areas where the two are head to head forcing down prices (such as London Heathrow and Manchester) are rationalised, or indeed more likely, that prices are reviewed and revised together.

Would such pricing collusion be tolerated? Could it be proved? A full merger with the loss of any one brand and a full fleet rationalisation and a dumping of airline investments that are not working would see AirBerlin go under and would most likely lead to a great many saddened faces at finance houses/lessors, banks, OEMs/manufacturers and everyone in-between. Let us hope the reports are all bluster as they usually are on this matter. But the more pressure the yields come under the more obvious a drastic reorganisation becomes as no Emir will stand back and watch as an airline carrying the pride of their nation on their tailfin falls from grace. Far better to merge and remain huge, lean and mean either under two brands or one. The logic is on the side of a merger and as such maybe it is time we moved this story from bluster to a likely near future scenario.

Date: March 10, 2017

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