TAP - Staying on Target
All,
Please refer to our updated analysis here.
At least if against all experience, one believes the latest promises of Joao Leao, some eight or nine months after we had initially been promised an agreement, it finally seems to be coming together - or at least yesterday’s estimate of “before year-end” did not move from his promise made two months ago. That is actually something to make us hopeful.
Agreement in Principle:
- Speaking from Brussels, Portuguese Finance Minister Joao Leao reiterated his expectation that the TAP restructuring plan will be approved before year-end, referencing an agreement in principle with the European Union.
- According to the statement he gave at the Ecofin meeting, “things are quite resolved” and there was only one or another point still in discussion.
- Without hinting at the solutions the parties have found, he stated that Portugal had found an agreement with the EC on the contentious points of alternative funding (other than the state) and the number of slots TAP would have to give up.
- Whether or not the EC truly supports the restructuring before the end of the year remains to be seen, but the precise timing is not so important now.
Bondholders not impacted:
- What exactly that means is still anyone’s guess. Ours, in particular, is that the bonds at TAP S.A. will not be diluted by much more than €1bn of new debt if that.
- We do not believe the new debt will be materially secured over assets because 1) those are for the most part already encumbered with mortgages and 2) there aren’t enough assets. TAP leases all its aircraft.
Own Contribution:
- On the sticky point of "Own Contribution", the Alternative Financing the Finance Minister was referring to, we think Lufthansa would have a reason to buy itself a stake and only last week Turkish Airlines had to deny ever having made anything it would call an advance. All three airlines are members of the Star Alliance.
- In light of Omicron, however, most CFOs will be battening down the hatches again and not even the EC can probably expect to see an investor step in now.
- So if the alternative financing point has been resolved one way or another, good.
Positioning:
We remain invested in the 24s with 4% of NAV. It’s a political play in which we are seeing room for solution. TAP has no more own aircraft and its transatlantic business model has been suffering more from the pandemic than most other airlines have. However, in the scheme of things the bonds are not significant enough to motivate Portugal to restructure TAP SA itself and so will likely remain untouched in the process. Perhaps Father Christmas will bring the restructuring this year.
Please reach out to discuss,
Wolfgang
T: +44 203 744 7003