Investors are dumping debt sold by EA Partners, a special purpose vehicle that holds the equity stakes of Etihad Airways PJSC and its partner airlines, after airberlin Plc filed for insolvency in the latest sign that the Gulf carrier’s partnership strategy is being unwound.
Yields on EA Partners bonds due in 2020 jumped to a record 11.7 per cent following an announcement from airberlin Tuesday that it would file for insolvency after Etihad pulled the plug on additional financing. The price on the debt slumped to 89 cents from 96 cents a week ago, reflecting lower expected recoveries.
It’s the second time in four months Etihad has rocked the airline industry by severing ties with European partners. In May, Alitalia SpA said it would start bankruptcy proceedings for the second time in a decade after the Abu Dhabi-based carrier pulled financing, sparking a yield surge in EA bonds.
Etihad bought a 29 per cent stake in Airberlin back in 2012 as it sought to build a network of minority investments that would help funnel more passengers into its Abu Dhabi hub, but that strategy is now being dismantled following the departure of CEO James Hogan earlier this year.
“Etihad recently wrote off $808 million exposure to its partner airlines,” CreditSights Inc. analyst Roger King said in a research note. “Fundamentally, the bonds should drop to 60.”
Etihad and its associate airlines sold the bonds two years ago, attracting orders for the 2020 issue at a yield of 6.875 per cent. The deal was later given a speculative-grade rating of ‘B-’ by Fitch Ratings, which noted that “the credit quality of the obligors varies substantially” given the entities involved. At the time, those included Etihad and its airport services subsidiary, airberlin, Alitalia, Air Serbia and Air Seychelles Ltd.