Lufthansa’s recovery needs holistic capital markets toolkit – advisers

11 February 2021 - 01:46 pm UTC

by Ryan Gould, Georgina Barnard and Emma-Victoria Farr

  • Access to capital markets unaffected by one-notch downgrade
  • More convertible or debt issuance on the cards
  • MRO unit Technik joins AirPlus International on disposal list

Empty seats, a lagging European vaccine rollout and a potential EUR 9bn state aid bill means Deutsche Lufthansa [ETR:LHA] is likely to leave no option off the table when it comes to charting a route to recovery later this year.

 

Advisers familiar with the flag carrier’s thinking say that a decision on whether to draw on the remaining EUR 4.5bn in silent participation offered by the German government will determine the course of a needed recapitalisation package, which could include further debt and equity issuance as well as asset disposals.

 

Lufthansa announced last week that it had successfully secured the refinancing of all liabilities due in 2021 – approximately EUR 2.6bn – through a two-tranche EUR 1.6bn bond. Chief Financial Officer Remco Steenbergen said that while the bond placement allows the airline to repay a EUR 1bn loan to state-owned development bank KfW, “it is likely [Lufthansa] will draw additional elements of the stabilisation package which are currently unused” dependent on the further course of the pandemic.

 

A hybrid recapitalisation plan that puts the Frankfurt Airport hub operator on a sound financial footing into 2022 could logically include raising another convertible bond following the issuance of EUR 600m in November or a further reassessment of debt instruments, according to the advisers.

 

Despite the one-notch downgrading of its senior unsecured debt to BB- by ratings agency S&P, Lufthansa still has “almost every option available to it”, one of the advisers said. “It is still performing like an investment-grade credit, and so access to the capital markets has been unaffected, if not encouraged,” he added.

 

A November report by S&P noted that efforts by the airline to arrest a plunge in revenues through capacity adjustments and liquidity safeguards would only partly offset a steep decline in air passenger traffic of up to 55% in 2021. While the group’s EBITDA is expected to rebound in 2021, low visibility regarding the pandemic’s duration adds a “significant degree of uncertainty” to the agency’s base case assessment.

 

Disposals: Gate open

Among other options for the airline include deciding on the fate of maintenance, retail and overhaul (MRO) unit Lufthansa Technik, advisers say.

 

One of the advisers said that it is “well known” that Technik is the most obvious option for a company looking to bolster its capital structure. But Lufthansa’s management and board are equally aware that trying to enact a strategic plan for an asset in this market is more nebulous, he argued, noting: “If you proceed with any option, you are essentially having to come to terms with the fact that you will lose money.”

 

Lufthansa said in its third-interim report that the coronavirus pandemic is “hurting performance in the MRO business severely”. A reduction in completed flight hours, pressure on airlines and the retirement of aircraft is having a “drastic impact” on Technik, which reported a 39% slump in revenues to EUR 2.97bn for the nine months ending September 2020. Total cash-at-hand for the group, including EUR 6.3bn undrawn from the stabilisation package, stood at EUR 10.1bn on September 30.

 

Timing around the launch of a process for Technik, should Lufthansa decide to explore it, remains undecided, according to the advisers. Bankers and financial sponsors are making preliminary noise around the asset but without any real conviction, they and two further advisers with knowledge of the matter said.

 

In an auction scenario, trade players like America’s Heico [NYSE:HEI] would be logical suitors, one noted.

 

Without a firmer recovery trajectory for passenger numbers, “it is hard to foresee any process [for Technik] whatsoever”, one of them added. The division has long been floated as a possible IPO candidate, prompting former CFO Ulrik Svensson to state last year that he expected Technik to remain in Lufthansa’s control in five years’ time.

 

Other potential M&A plays for Lufthansa include corporate travel payments unit AirPlus International. This news service reported in December that the company had heard pitches from financial advisers seeking to help it offload the business, which provides corporate cards and online payment management tools to peers including Singapore Airlines [SGX:C6L] and United Airlines [NASDAQ:UAL].

 

As with Technik, the case for offloading AirPlus during a time when global travel remains at the mercy of lockdown restrictions is less than favourable, one of the advisers said. AirPlus’s core revenue – decimated by the lack of business travel – would need to demonstrate recovery before the airline pushes ahead with a sale, he added.

 

Any move by the airline, said by Chief Executive Carsten Spohr to be burning through cash at a rate of EUR 1m every two hours, is expected to be holistic, the advisers noted.

 

“The focus for almost every airline is on liquidity and the huge deleveraging game that is going to come at the end of all this,” one of them added.

 

A representative for Lufthansa declined to comment given the company is in a silent period ahead of announcing its FY20 results on 4 March, but referred to comments made in the past noting that Lufthansa is reviewing its portfolio, especially non-core businesses. 

 

A partnership at Lufthansa Technik could be possible, if general conditions allow for it, but the company does not intend to conduct fire sales, the representative added.