Miami – Earlier this summer Airways reported on an upcoming auction of Etihad-linked bonds. Etihad (EY) had issued the bonds to shareholders, primarily Middle East investors, to finance the stakes it had taken in Alitalia (AZ) and Air Berlin (AB). Etihad had purchased stakes in the two airlines as part of an ill-fated push into Europe.

The total amount of the bonds was US$1.2bn across two issues, a US$500m note sold in 2015 and a US$700M note sold in 2016. The funds from the bonds would be used to prop up Air Berlin and Alitalia.

Alitalia and AB have entered bankruptcy and the former is no longer flying. As for AZ, the ax will finally fall on October 14 and the airline will cease all activities then but tickets have been and are still being sold for travel beyond this date.

According to the Italian daily newspaper Il Corriere della Sera, by October 15, AZ will have to honor, reprotect, or refund a total of approximately 255,000 tickets or vouchers, sold in Italy and abroad, amounting to an average of US$160 (€135) apiece, all types of travel included, for a total amount of US$40.2m (€34m).

Due to the demise of AZ and EY, the US$500M bond fell into default in July, and late in the month Emirates (EK) held an auction to try to save the structured debt. However, that auction yielded a bid of just a fraction of their assets’ value.

Alitalia Airbus 3230-200 EI-DSW. Photo: Alberto Cucini/Airways

Low Bid

The Financial Times reported that the highest bidder offered just US$1.8m for the US$199m of distressed loans. That is equal to less than 1 percent of their face value.

The Financial Times also notes that Etihad is under no legal obligation to help the bondholders. But expectations had grown that there could be some sort of bailout. The airline likely would want to stay on good terms with its primarily local investors.

Hope for Bondholders

EA Partners II, an investment arm of EY, on Tuesday held a call with bondholders to give further detail on the results of the auction and to outline restructuring options.

At this point, the bidder, so far unidentified, is hoping to recover money through litigation. The bidder has also offered to split any proceeds above 35 percent of the loans’ face value, with bondholders receiving 60 percent of cash received above this threshold.

Bondholders were told that the bidder was an investment firm that has a long record of collecting on non-performing loans through litigation. At a later date, bondholders will decide if they want to formally accept the bidder’s offer.

The US$500m EA Partners II bond has not defaulted but is trading at less than 63 cents on the dollar. That information comes from Tradeweb. This bond had traded as high as 74 cents earlier this year.

Featured image: Etihad A6-BLK Boeing 787-9 Dreamliner in Special Livery. Photo: Misael Ocasioi Hernandez/Airways