IAG’s I-O-U

IAG’s I-O-U​

The Story

This week, International Airlines Group (“IAG”) signed a $1.8 billion multi-borrower Revolving Credit Facility (“RCF”) (Financial Times). The RCF will be available for a period of three years with the potential for two one-year extensions.

IAG's subsidiary companies, Aer Lingus, British Airways and Iberia, will each have separate borrower limits, which should provide flexible financing for the group. As security for the loan, IAG has offered aircrafts and lucrative “ crown jewel” landing slots at London’s Heathrow and Gatwick airports (Financial Times).

This comes after IAG issued two series of bonds of four and eight-year terms to raise €1.2 billion in additional finance (Financial Times; IAG press release). This was announced on 18 March 2021 as IAG’s first junk-rated bond after losing their investment grade status in May last year (Bloomberg).

To further manage the financial impact of the pandemic, in September 2020 IAG raised €2.7 billion in equity capital via a heavily discounted rights issue (Reuters). Further, in December 2020, British Airways received government support in the form of a 5-year Export Development Guarantee term loan of £2 billion and also reached agreement with the Trustee of New Airways Pension Scheme to defer £450 million of pension deficit contributions (IAG press release).

What It Means For Businesses And Law Firms

IAG's situation represents the rising debt burden facing the airline industry as global travel is curtailed. The Financial Times puts the figure at more than $300 billion in net debt for the largest airlines collectively, likely compromising balance sheets for years to come and requiring increasingly creative forms of collateral (Financial Times). For example, at the beginning of March, American Airlines issued $6.5 billion worth of junk bonds and $3.5 billion in loans, putting up their Air Miles Loyalty Programme as security.

That said, airlines have so far not appeared to struggle in accessing debt finance. Some even speculate that investors are moving away from some of the fastest-growing companies throughout 2020, such as Zoom and Peleton. These investors may be tapping into companies that struggled throughout the pandemic but are now presenting optimistic signs, making the capital markets a favourable environment for airlines (Financial Times). Further, the deterioration in credit rating for most of the global airlines that have faced operational standstill coincides with historically low-interest rates and investors' search for yield in higher-risk sectors.

Milbank LLP advised Citibank as sole structuring agent on the RCF on this occasion (Milbank press release). More broadly, debt finance lawyers advising on an RCF could be involved in due diligence, advising on compliance with any undertakings provided in the facility agreement, and drafting and negotiating the loan documentation. This could include a term sheet, hedging agreement, security documents and guarantees, and importantly, the facility agreement.

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