British Airways owner IAG taps bond market for €1.2bn to see it through pandemic

BA's Waterside building near Heathrow Airport could also be sold to raise more funds

Tailfins of British Airways aircraft grounded at Heathrow Airport terminal 5 during the pandemic. Parent company IAG sold $1.4bn of new bonds and confirmed it is considering selling BA's Heathrow headShow more

British Airways owner IAG raised €1.2 billion ($1.43bn) in a bond issue it said would help it survive a potentially longer than expected travel downturn.

Airlines are counting on a summer travel reboot after a year of minimal income because of coronavirus restrictions, but rising case numbers in some countries and delays to Europe's Covid-19 vaccine rollout could derail the recovery.

IAG, which is burning through about €185 million a week as a result of the pandemic, has been cutting costs while flying only 20 per cent of its normal capacity.

The owner of Iberia and Vueling in Spain and Aer Lingus in Ireland said last month it had sufficient liquidity to ride out the crisis but would continue to explore new debt options. On Thursday, it decided to add to its war chest.

It said the proceeds could be used to withstand a more prolonged downturn or provide "flexibility to take advantage of a recovery in demand for air travel".

Announcing final terms of the bond, IAG said on Friday that demand was higher than expected, enabling it to raise €1.2bn, more than the €1bn originally planned.

The senior unsecured bonds which were issued in two tranches with €500m due in 2025 and €700m due in 2029, were priced at a yield of 2.75 per cent for the first and 3.75 per cent for the second tranche.

IAG had started marketing the bonds at a yield of 3.25 per cent for the four-year and 4.25 per cent for the eight-year, but after recording over €3bn of demand from yield-starved investors, was able to tighten it significantly by 50 basis points on each.

Such a tightening is relatively unusual in the bond market and the final pricing level represents a significant result for a company facing seven-year borrowing costs in excess of 7.5 per cent in September in the midst of the Covid-19 crisis.

In a low-rate environment and with economies set to reopen, bond investors have become increasingly keen to buy debt from well-known airlines because it is one of the few sectors still offering a high yield, a source said.

Although IAG lost its investment grade rating last year after the pandemic wreaked havoc on airlines, progress on Covid-19 vaccinations has led investors to revisit the sector.

Shares in IAG traded down 3.6 per cent at £2.07 at 11.32am on Friday. The stock has gained 27 per cent over the past month.

Lufthansa and easyJet have both tapped bond markets in recent months, with the German airline repaying a big portion of a government bailout after its latest €1.6bn debt sale and easyJet raising €1.2bn in February.

British Airways also said on Friday it is considering the sale of its headquarters building as staff at the airline switch to home working, reducing the demand for office space.

The potential sale of the building was first reported by the Financial Times. The building was completed in 1998 at a cost of £200 million ($279 million).

The BA complex, Waterside, is near Heathrow Airport, west of London, and is also the headquarters of IAG.

British Airways said in a statement that many employees enjoyed working from home and its future policy would likely be a flexible mix of home and office working.

"We've restructured our business to emerge from the crisis and are considering whether we still have the need for such a large headquarters building," a spokesman said in a statement.

To survive the pandemic, British Airways has spent the last year cutting costs, including shedding over 10,000 employees, leaving it with about 30,000, most of whom don't work in the office but are pilots, cabin crew, engineers or airport staff.

The airline has also sought to raise cash by selling famous works of art that formerly hung in its executive lounges.

Waterside's long-term future was already hanging in the balance as it would need to be demolished if the proposed expansion of Heathrow goes ahead.