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British Airways receives a £2 billion loan guaranteed by the UK Government

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British Airways snuck out an announcement to the Stock Exchange on New Years Eve. This is normally when companies bury bad news, knowing that the financial press will have forgotten about it when people are back at their desks, but this one is positive.

The airline announced that it has secured a £2.0 billion five year loan. For clarity, this money is ring-fenced for BA and is not for broader IAG purposes.

This is a soft loan which carries a UK Government guarantee.

British Airways £2 billion soft loan

Technically, it is a 5-year Export Development Guarantee Facility, partially underwritten by UK Export Finance. This means that it will be priced very low – how low depends on what percentage of the loan is covered.

British Airways will borrow the money as usual from a group of banks, but the Government is on the hook for the bulk of it if British Airways fails to make repayments.

Back in the days when I worked in Project & Export Finance you would typically find around 80% of the loan covered. This means that, if BA defaulted on the entire £2 billion, the Government would reimburse the banks £1.6 billion.

The airline has committed to restricting dividend payments to its Spanish parent, International Consolidated Airlines Group, whilst the loan is outstanding.

British Airways £2 billion loan

UK Export Finance is the UK’s export credit agency and “provides the Export Development Guarantee to support the working capital and capital expenditure needs of UK exporters that meet certain criteria”.

You may be wondering why British Airways, as a company which doesn’t “export” anything, qualifies for such a taxpayer guarantee.

Such guarantees exist because exporting is good for UK jobs and the balance of payments. Exporting can be risky, however, because of the difficulty of enforcing payment and banks may be unwilling to provide working capital.

These guarantees are usually given to companies such as Rolls-Royce who need, for example, to fund a contract to sell engines made in the UK to an overseas airline which has credit risks.

Cynics could see this as a way for the Government to quietly prop up the airline. British Airways will use the money to:

“enhance liquidity and provide British Airways with the operational and strategic flexibility to take advantage of a partial recovery in demand for air travel in 2021”

The broader International Airlines Group is currently sitting on €8 billion of cash and undrawn bank loans, before adding in this additional £2 billion. Further loans are currently under discussion.

The official Stock Exchange announcement is here.


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Comments (42)

This article is closed to new comments. Feel free to ask your question in the HfP forums.

  • Solitaire says:

    Lucky for investors who bought stock on NYE. Monday should bring them a decent % profit.

    • Boi says:

      Please elaborate….because I actually bought stock on NYE. Should I get excited?

    • Numpty says:

      BA now has a £2B debt facility with the condition that IAG restricts divi payments – can’t see that resulting in SP increasing, will be interesting to see what happens.

  • Solitaire says:

    The loan announcement was made, possibly tactically, after trading ceased on NYE (early close). The 2bn loan is great news. On Monday there should be a significant gap up. So a decent profit if you bought close to 160.

  • Will says:

    We’ll see. IAG expect to post >£5bn loss this year. Even in the good times that’s 3 years profits wiped out.

    Government policy has effective been to ensure asset owners (be it property, or in the case of BA plane lease companies) are protected at the potential expense of our currency.

    It’s akin to going into a casino, borrowing some money to place on red and when black comes up printing the money to pay back your creditor.

    It’s very iffy economics.

  • Matty says:

    Boom!

This article is closed to new comments. Feel free to ask your question in the HfP forums.

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