The Brazilian Development Bank (BNDES) and Bradesco (one of Brazil’s largest banks) are putting together a financing package for the country’s airlines. It is expected that a final agreement will be reached by the end of next week with the disbursement expected to take place in the second half of June. With airlines around the world suffering from decreased demand, they are left to explore various options to raise funds and keep operations going.
According to the Brazil Journal, the original plan to providing funding for Brazil’s three airlines (GOL, Azul, and Tam) was set to be R$10 billion. However, changes have resulted in this number being brought down to R$6 billion. In US dollars, this equates to roughly $1.05 billion.
External to this is funding for Embraer – which is reportedly eligible for an additional US$500 million and another US$500 million on the bank’s normal export finance lines.
The BNDES has made it clear to airlines that it will not make disbursements unless the market underwrites at least one-third of the debt to be issued by the companies. The absence of this level of market participation would be considered a ‘deal-breaker’.
“This is not a classic bailout…It is a market solution with the bank’s participation. Anyone who has access to the capital market must access it directly.” -Unspecified bank source via Brazil Journal
Another requirement for funding is that airlines must re-negotiate and extend payment terms with aircraft lessors. Additionally, those issuing the debt will be issued warrants, giving holders the right to buy shares at a fixed price. Warrants allow the purchase of respective airline shares five years from now, at the market price on the day of issue.
What does this all mean?
It is estimated that each of the three airlines – Azul, GOL, and LATAM – will be able to raise up to R$2 billion (US348 million) in the market with these instruments, with BNDES giving a firm guarantee for two-thirds of the operation. This will hopefully secure the short-term future of these three Brazilian carriers.
However, some uncertainty still exists, leading us to question whether or not this would be a safe lending opportunity for investors. In fact, the greatest source of uncertainty is how severely the country will be hit by this pandemic. According to the Ottawa Citizen, Brazil is fast becoming one of the world’s coronavirus hot spots, registering a record number of cases and deaths this past Wednesday. Some have criticized the country’s leader for not taking the situation seriously, causing confusion across the country. Thus, if the situation worsens for Brazil, we will likely see demand drop further and take a longer time to recover.
In the short-term, this appears to be a necessary measure in order to stabilize a sector which plays a significant part in the nation’s economy, and provides tens of thousands of jobs directly and many more indirectly.
Still, in the long-term, we may end up seeing some consolidation depending on how damaging this pandemic is to air travel and to the nation’s economy.
Do you think there will be enough demand for three Brazilian airlines after this pandemic? Let us know your thoughts in the comments.