United Airlines and Kingsland Holdings have agreed to provide up to $250 million of four-year financing to Bogota, Colombia-based airline Avianca.
The debt is priced at 3%; interest will be structured as payment-in-kind (PIK) until maturity, granting Avianca greater financial flexibility.
Kingsland is a 14.5% shareholder in Avianca. United’s interests in Avianca stem from the U.S. carrier’s plans to grow its Latin America footprint through an alliance with Avianca and Panamanian airline Copa Airlines.
PIK bonds, usually issued by financially distressed companies, pay interest in additional bonds rather than in cash during the initial period. PIK bonds may have low ratings and normally pay interest at a higher rate. Although they may provide some financial relief, PIK bonds add to liquidity problems as the debt eventually must be paid off.
The transaction is contingent on Avianca’s reaching agreements, consistent with the Avianca 2021 plan that aims to improve operational efficiency, strengthen the company’s financial position and liquidity and improve operating results.
The loan will convert into shares at Avianca’s option at an equivalent price per share of $4.6217, representing a 35% premium over the 90-day weighted average price through Oct. 3, subject to certain conditions, including that the share price of parent company Avianca Holdings’ share price consistently trading above the $7 mark.
The loan also may be converted into shares voluntarily at the discretion of United Airlines and Kingsland Holdings. The financing will be secured by a pledge of stock in the parent company’s major subsidiaries. The financing is in documentation and is expected to be executed during October. Funding remains subject to certain other conditions, including successful conclusion of Avianca’s debt re-profiling plan in a manner consistent with the Avianca 2021 plan, as well as closing of the company’s exchange offer for its $550 million bond that matures in 2020.
Once this process is concluded, Avianca expects to offer preferred shareholders the opportunity to participate in $125 million financing under similar conditions.
In May, Avianca’s debt refinancing hit a snag when majority shareholder BRW Inc. used Avianca Holdings common stock as collateral in a $456 million loan from United Airlines; BRW defaulted on that loan, paving the way for replacing the company chairman.
This latest cash-raising exercise follows the reporting on Aug. 15 of second-quarter financials for Avianca Holdings in which the company posted an adjusted operating loss of $36 million on revenues of approximately $1.1 billion.
These results primarily were driven by a 6.9% decrease in total operating revenues as Latin American currencies devalued against the U.S. dollar, coupled with an average fare reduction of 8.4%, which resulted in a 9.2% year-on-year decline in passenger yields.
Passenger revenues decreased by 5.5%, while cargo and other revenues decreased 13.8%, primarily due to events unrelated to the cargo operation. In addition, second quarter 2019 total operating expenses decreased by 0.3%, primarily driven by a 34.5% decrease in flight operations expenses as well as a 14.2% reduction in salaries, wages and benefits expenses. The latter was partially offset by increased jet fuel consumption, which on average increased by 5.5% in the second quarter of 2019, as well as by a 44% increase in maintenance and repair expense, which increased due to higher provisions for engine return conditions.
Avianca Cargo continues to be the leader in the Colombian market with a 38.3% market share and the third-largest air cargo provider at Miami International Airport with a 13.7% market share.