Sri Lankan Airlines achieves lowest yield ever from country while Indian airlines take-off

Dino D'Amore
By Dino D'Amore June 24, 2014 16:40

Sri Lankan Airlines achieves lowest yield ever from country while Indian airlines take-off

The unequivocal Sri Lankan government guarantee we reported on recently has allowed the national airline to price its US$175 million debut offering of five-year bonds late yesterday at par to yield 5.3%. The Reg S deal finished 32.5bp inside the initial guidance.

The bonds offered a 65bp premium over the sovereign paper due for 2019, which had a 4.65% yield prior to the announcement. The airline’s bonds jumped 1 point to yield 5.07%, about 50bp over where the sovereign was traded this morning.

The Sri Lankan government backing helped the airline secure a BB- and B+ rating from Fitch and S&P, respectively. The carrier will use the proceeds to finance aircraft pre-delivery payments and use the remainder as working capital. As reported last week, the offering drew anchor orders of about US$300m during the roadshow with investors demanding a 5.5% yield.

Although the eventual yield was a record low for a Sri Lankan corporate issuer, it was actually very high taking on a global scale and that beyond doubt is what attracted institutions. The final US$3bn order book comprised 85 investors, 70 of which were institutions. The rest were private banks.

This deal proves that the APAC markets are seeking out yield at the moment above all else. Also, given that SriLankan Airlines has been in the red for a number of years with a 2013 loss reported at over $170m, and the fact that airlines are not exactly in favour at the moment given the geo-political risks affecting oil prices, we have to laud this deal as quite a good one all in all, but Sri Lankan Airlines in this case went for a wide syndication.

This points to possible wishes to build relations with institutional investors so as to tap the market again at some point soon, but can the airline do this again without a state guarantee? Not likely unfortunately. Could we argue that investors, at least in this instance, are focusing on return above all else and as such are at risk if the US Federal Reserve puts rates up?

Meanwhile Air India was finally accepted into the Star Alliance (see news below) and at the same time almost all airline stocks in India shot up this morning after the aviation minister asked states to cut taxes on aviation fuel. This is a development we have for some time been warning was coming (but we did say do not hold your breath).

We calculate that if ATF taxes are lifted or cut by anything more than 25%, then airlines in India will start to show some serious gains. Investing in Indian airlines remains a serious risk on anything not carrying the IndiGo logo on the tail fins but still, it could be that this risk is about to seriously diminish.

Accordingly Jet Airways was up 6.6% at Rs 261 while Spicejet was up 10% at Rs 20 which opens-up the stock to short interest in the here and now while other long term investors might wish to wait until a far more concrete announcement is made or until separate states start to move to cut prices, as it may yet be that something silly such as sub 5% is cut from the ATF bill. We wait and hope.

Meanwhile Virgin Atlantic has firmed up one of its five Boeing 787-9 options but has given no indication as yet of the fate of its deferred A380 order. One wonders if we are about to see a cancellation go through on these aircraft before the year is out, and indeed if we are then will Virgin Atlantic turn to Amedeo to lease A380s?

One thing is for sure, Virgin Atlantic will need A380s in the long term as it is losing its big sell to the public – that of glamorous travel superior to the likes of BA. The service may be better, but the public love the A380. Virgin Atlantic leasing A380s does indeed seem to solve a great many issues for the airline in the here and now – but will Delta agree with that assessment?

Dino D'Amore
By Dino D'Amore June 24, 2014 16:40
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