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IAG raises a further €1.2 billion via a junk bond issue

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IAG, the Spanish-based parent company of British Airways, announced a new fund raising on Thursday.

During the day, the company raised a further €1.2 billion via a bond sale. The money will be repaid in two tranches:

  • €500 million to be repaid in March 2025
  • €700 million to be repaid in March 2029
IAG raises €100m via bond issue

For clarity, the bonds are only for sale to institutional investors and not to the general public.

The four year bonds were issued with a coupon of 2.75% (down from a proposed 3.25% at the start of the day). The eight year bonds were eventually priced at 3.75%, down from a proposed 4.25%.

Despite the cut in the coupon, it is still above the European average for junk-rated corporate debt of 2.59%. The bonds are rated B1, which is a ‘junk’ rating.

For a quick comparison, the typical five year fixed rate UK savings account is currently paying 1% to 1.25%. There would be considerable demand – albeit with considerable risk compared to a savings account – if similar £-denominated bonds were offered to UK private investors.

As we covered, British Airways saw its debt drop into ‘junk’ territory last year.

The stated purpose of the fund raising is to “include but not be limited to”:

  • strengthening the Group’s balance sheet and increasing the Group’s overall liquidity position
  • helping the Group withstand a more prolonged downturn in air travel
  • providing the Group with the operational and strategic flexibility to take advantage of a recovery in demand for air travel
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Comments (26)

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

  • mr_jetlag says:
    18 Mar18 March 13:44

    Rob were you DCM in your old bank? There are a ton of macro reasons this is not an excessively “high yield” coupon. Carnival bond is at 5.75% for instance.

    • Rob says:
      18 Mar18 March 13:58

      I am just comparing to the European junk bond (corporates) average yield.

      Given IAG’s current cash pile it isn’t as risky as Carnival.

      • mr_jetlag says:
        18 Mar18 March 14:20

        I suspect they also looked at the recent uptick in 10y treasuries and priced accordingly. Agreed Carnival is a much riskier play (so it was smart of them to refinance earlier).

    • Bagoly says:
      18 Mar18 March 14:07

      In a few year’s time we will look back and see how ridiculous it was that 4% was considered “high-yield”!

      • Rob says:
        18 Mar18 March 17:37

        15 years ago I was getting 7% on money in the bank. If I was getting that now my lifestyle would be very different!

        • mr_jetlag says:
          18 Mar18 March 18:26

          I was doing 6.25 in Icesave…

        • Mr(s) Entitled says:
          18 Mar18 March 23:11

          It would be remarkably different because you wouldn’t have ridden a low cost to carry debt fueling an ever inflating asset bubble.

  • Lady London says:
    18 Mar18 March 13:49

    How liquid are corporate bonds like these once bought?

    Are transaction charges to buy or sell onerous?

    • mr_jetlag says:
      18 Mar18 March 14:15

      LL – lots of buysides will trade secondary market corp bonds, either OTC or on exchange. If you’re asking as a retail investor, these aren’t typically available and you would either need to gain exposure via a bond ETF (which comes with entry fees, charges etc – not as much as a BA ticket but still 1-2%) or a HY bond fund.

    • Benilyn says:
      18 Mar18 March 18:51

      £100k min denom (at least the other IAG bonds are). But relatively liquid if we are talking those sizes… Interactive Brokers should let you buy for PA (you can check if you can buy existing IAG bonds).

      Final pricing E500m 4Y @ 2.75% and E700m 8Y @ 3.75% and order books >E5bn

      • Benilyn says:
        18 Mar18 March 18:54

        And just to note, if you are GBP currency native and buy these EUR bonds… you could easily lose a lot due to FX since upside is relatively limited on this bonds given tenor and vs equity where upside is uncapped. So be careful…

        • Sloth says:
          18 Mar18 March 19:43

          Surely if you were realistically looking to buy these you would just enter into an fx swap to remove the ccy exposure

  • Howard says:
    18 Mar18 March 13:59

    May be a silly question but why not make it available to the general public if it will bring the yield down? I assume it’s got something to do with additional compliance etc.

    • JDB says:
      18 Mar18 March 14:18

      Takes much too long as needs full prospectus and the offer to be open for a fair period etc. and usually has fairly high minimum order size that would stop most people being interested.

      • C says:
        18 Mar18 March 15:48

        Moreover, most / all banks involved in the sale will not have their legal and compliance procedures set up to sell to retail investors, even were they to go through the formal regulatory hurdles. In the UK, retail investors are largely overlooked in the primary distribution of securities, both equity and debt.

      • Magneto says:
        18 Mar18 March 18:15

        A full prospectus has been produced for the issuance. Institutional investors won’t just invest a billion euros without a prospectus…

    • Rob says:
      18 Mar18 March 17:39

      For a retail investor, in theory the yield should be even higher.

      A pension fund has to choose between negative yield on bonds or 4% here. You can still get 0.5% on some savings accounts, so realistically you’d want a 1% higher return on the IAG debt to compensate.

  • JonD says:
    18 Mar18 March 16:09

    Optimistically I’m hoping this is fundraising to allow IAG to aggressively expand once air travel resumes rather fighting for survival now.

  • Chris Heyes says:
    18 Mar18 March 17:48

    JonD I think you’ll find that IAG are relatively safe from going under at a guess IAG 10% Chance of going under.
    Compared with Virgin probably at around 70% Chance of going under now they have agreed some new money

  • BuildBackBetter says:
    18 Mar18 March 20:06

    Not sure if covered already, BA looking to sell their Heathrow office (waterside)

  • Lady London says:
    19 Mar19 March 01:08

    That repricing was smart. Have been so long out of the City took a guess : Yes it’s the usual suspects Morgan Stanley and Goldman running it… not much changes.

    2 Spanish banks on there too. Just to remind us who really owns IAG.

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