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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.

British Airways BA Amex American Express

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Comments (42)

  • Mark says:

    I own a decent size chunk of IAG with an average price @115.
    Looking well, hopefully gap up on the 4th of Jan

  • Winchpete says:

    Not clear how yet more debt is positive. This action also suggests that BA expects to accrue substantial losses in the months ahead.

    • Rob says:

      Cash is king at the moment.

    • Brian says:

      “ This action also suggests that BA expects to accrue substantial losses in the months ahead.”

      They clearly will.

    • insider says:

      BA will need all the cash it can get! They still have to buy aircraft in 2021, pay bills etc. Having cash in the bank during these times is super important, who knows how long it will be like this. The (presumably low) cost of the debt is well worth it

    • Toxteth O’Grady says:

      Maybe so.
      Does this borrowing imply BA may have to get a bailout if the Covid overreactions continue?

      • Rob says:

        The announcement talks about negotiating more borrowing, which could be a sale and leaseback of aircraft or a secured loan of some sort.

        Realistically, IAG should have enough cash now to see it through to cash break-even, if not accounting break-even.

  • Rob(staaaar) says:

    Isn’t this govt biase compared with the lack of support VA?

    • Chrisasaurus says:

      Are we doing the pedantry about the UK govt not supporting an Australian airline?

      Or to answer more directly it’s not apples to apples – VS was a basket case and probably still is, and while I am a fan both of VS and the competition they provide, they’re not as essential to the country as BA are and crucially BA have traded debt whereas VS never did (though supposedly could have done had they chosen.)

      • Harry T says:

        Because VS weren’t profitable before covid and didn’t have a very sensible business model.

    • insider says:

      Who says VS aren’t talking to the government about this too? Presumably they can apply?

  • Tim W. says:

    I wonder what Mr O’Leary will make of this!

  • Magic Mike says:

    Does this open the door for VS to request similar?

    • memesweeper says:

      Given the mechanism, I think yes. Virgin were locked out of the corporate coronavirus recovery scheme but this isn’t that vehicle.

      • Bagoly says:

        Perhaps this loan explains why the British government was being apparently perverse about wanting to not be limited by Brussels regarding State Aid in the Brexit negotiations. In which case Virgin may well get similar.
        The cynic in me wonders how many “influencer cards” (I forget the official name) are going to government ministers as a result.

  • Nick says:

    Interesting move… “we don’t need or want state aid”, they said.

    Does this also affect whether they can make more redundancies? Or is the restriction only on dividends?

    I wonder if they’ll use it to offer lower fares to try to stimulate the market.

    • insider says:

      It’s still a loan that has to be paid back, not quite as direct a state aid as AF / LH have received. I don’t think there are many people left to be made redundant at BA! (apart from maybe the pilot group)

  • Rui N. says:

    “You may be wondering why British Airways, as a company which doesn’t “export” anything”

    Oi? Everytime a non-UK resident buys a ticket from BA that’s an export for the UK’s trade account. International airlines are usually of the biggest exporters in a country (and big importers as well), it’s likely it’s the same in the UK with BA.

    • Rob says:

      Obviously that is correct, but it is not the point of the export guarantee scheme.

  • Tom says:

    Marvellous news 🥳

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