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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)

  • Ross Parker says:

    A question for the Corporate Finance types here: is the “ring fencing” of the loan to BA meaningful? Could IAG not simply use HMG money to displace private money in BA and thus shift the funds anywhere in the group?

    • Chrisasaurus says:

      Certainly – if nothing else this is 2bn IAG now don’t have to pony up so it’s already sort of achieved that goal

    • mr_jetlag says:

      In practice “ring fencing” to the subsidiary is meaningless as you say it replaces funding that would have been provided by the group / topco.

  • DAJ says:

    What impact will this have on dividend payments over the coming few years? I note the article states that it will restrict dividend payments to its Spanish parent IAG.

    • insider says:

      you won’t be receiving dividend payments if BA isn’t upstreaming cash to IAG

  • Stephen says:

    Remember Carillon or Thomas Cook. Maybe BA is just too big to allow to fail. If it’s good enough for banks, why not a more grass roots company?

  • Will says:

    And if they do default on it and the gov is on the hook, the BofE can just magic up £2bn in its QE account and buy the defaulted bonds off the pension funds.

    • Toxteth O’Grady says:

      BA has a massive pension fund, still with a large deficit I believe.
      How safe will this now be?
      Maybe it’ll be directed into the govt. PPF?

  • kitten says:

    2 billion doesn’t seem a big sum in light of BA’s cash burn.

    Did they ‘bury’ this announcement because there’s a much bigger sum coming ?

    • insider says:

      £2bn will get the airline through the worst of Covid and hopefully until the summer, where some cash should start rolling in if the vaccine proves to be effective

  • Colin MacKinnon says:

    BA used to be the world’s biggest pension fund that owned an airline – basically huge pension deficit.

    Now IAG has got lots and lots of Covid debt. And fewer aircraft to fly customers if things all bounce back quickly.

    Not only that, if there are any profits – presumably after paying off at least this 2bn so as to pay dividends – those profits are now split in proportion between five shares instead of two, thanks to the rights issue.

    For the life of me, I can’t see how shareholders are going to get any return for years?

  • Joan says:

    Off topic but I recall joining Seat spy ages ago I think through an offer in here for £1.99 a month . I decided to think about a holiday for November 2021 and as I have 3 companion vouchers to use , decided to look up seat spy . It seems to be now called Reward flight finder – or am I getting mixed up . I’m definitely having £1.99 taken out of my Amex each month . But when I log into reward flight finder it says my membership is Bronze only – which is free . Can anyone help or am I going mad ?

  • flyforfun says:

    “For the life of me, I can’t see how shareholders are going to get any return for years?”

    I don’t think airline shareholders are in it for the money! 🙂 😀

    I bought my shares for the Shareholders discount. That’s now defunct, but the shares were valued a lot more than I paid for them prior to Covid. The share issue has, if I choose to sell now, put me back into profit overall.

    My shareholding is probably an annoyance to the company it’s so small, but I can afford to hold onto them for 20 years or so and see what they are valued like when I may need a little cash boost for my nursing home fund!

    • DAJ says:

      My holding is also small but nostalgic – I own the grand total of 747 shares!

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