British Airways, a core airline of the International Airlines Group (IAG), has received commitments for £2.0 billion ($2.73 billion) worth of loans. This credit will be used by the airline to ‘enhance liquidity’ and provide ‘operational and strategic flexibility’ in 2021. This fresh round of funding comes as the airline continues to take delivery of new aircraft while anticipating a partial recovery of air travel demand in the year ahead.
Five-year term-loan for British Airways
At a value of £2.0 billion, IAG states via a press release that the five-year term-loan Export Development Guarantee Facility is underwritten by a syndicate of banks and partially guaranteed by UK Export Finance (UKEF).
British Airways expects to make use of this facility as early as this month, although it remains subject to an agreement of final terms with the lenders and UKEF- the UK’s export credit agency. The UKEF provides the Export Development Guarantee to support the working capital and capital expenditure needs of UK exporters that meet certain criteria.
The airline is “entitled to repay the loan at any time on notice” and, according to the terms of this arrangement, will be restricted on its dividend payments to IAG – among other non-financial covenants.
“The proceeds from the UKEF facility will be used to enhance liquidity and provide British Airways with the operational and strategic flexibility to take advantage of a partial recovery in demand for air travel in 2021 as COVID-19 vaccines are distributed worldwide.” -Stephen Gunning, Chief Financial Officer, IAG via press release
Finnair also a beneficiary of UK Export Finance
In an attempt to maintain liquidity and financial solvency, looking for large sums of money in the form of private and government loans has become a common practice in the past year. This has taken various forms, including putting aircraft or other assets up as collateral.
In mid-December, Finnair announced that it had been granted export credit support of more than €100 million ($119.3 million), which will come from the export credit agencies of Germany, France, and the United Kingdom. In this carrier’s case, the credit support was offered to qualified purchasers of Airbus aircraft, more specifically, an Airbus A350-900 aircraft that was delivered to Finnair in September 2020.
IAG reports that it continues to have strong liquidity with cash and undrawn facilities of €8.0 billion as of November 30th, excluding the UKEF facility. Above and beyond this UKEF loan, IAG is continuing to improve its liquidity by exploring other debt initiatives.
British Airways was hit particularly hard in December when a new, more-infectious mutation of the novel coronavirus was discovered in the UK. In the span of a week, dozens of countries around the world imposed tough travel restrictions and even travel bans for UK travelers. This additional loan guarantee will be welcome news for the airline as it looks to weather these latest storms until a vaccine can be widely distributed.