Abu Dhabi said to study restructuring options for $1.2bn Etihad-linked bonds

An Etihad Airways Airbus A380 taking off in London. (Shutterstock)
Updated 19 September 2018
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Abu Dhabi said to study restructuring options for $1.2bn Etihad-linked bonds

  • Bonds issued through SPV with other airlines
  • Etihad asks Abu Dhabi government for help

DUBAI: The government of Abu Dhabi is looking at proposals to restructure some $1.2 billion of troubled bonds that were issued by Abu Dhabi state-owned carrier Etihad Airways in partnership with other airlines, sources familiar with the matter said.
Etihad issued $700 million of bonds through a special purpose vehicle (SPV) called Equity Alliance Partners (EAP) in 2015, and $500 million in 2016. Proceeds of the paper went to Etihad and other airlines it partially owned at the time, including Alitalia and Air Berlin, which are now both insolvent.
The notes were seen as strengthening Etihad's partnerships with those airlines after it spent billions of dollars in acquisitions.
The EAP bonds have been trading at a significant discount for over a year, however, after Alitalia entered special administration and Air Berlin filed for bankruptcy.
Etihad has no legal responsibility to bail out the portion of the bonds which benefited the two European airlines as the notes have no cross-default provision.
But with over $500 million of the paper held by United Arab Emirates investors, it has asked the Abu Dhabi Department of Finance to find a way to reduce losses for investors and limit any damage to the reputation of the local debt market, sources familiar with the matter said.
The department is now working with a financial adviser to find restructuring solutions, said the sources. One option being discussed could involve adjusting the structure of the paper to obtain a better credit rating. Rating agency Fitch has been involved in some of the discussions, the sources said.
Etihad declined to comment while a spokesman for the Abu Dhabi Department of Finance did not respond to a request for comment. Fitch declined to comment.
Any type of restructuring would require bondholders’ approval.
Etihad agreed to cover Alitalia’s portion of the debt, equivalent to around $230 million, at maturity through an agreement between the airlines which was signed before Alitalia entered special administration. But Air Berlin’s portion, of roughly the same amount, has no such guarantee.
Any intervention by the Abu Dhabi government, which could materialise before the end of this year, might see Abu Dhabi inject around $200-300 million into the issuing vehicle, said the sources.
This amount would be applied towards a partial early redemption of the notes at a discount of around 15 percent to par value for note holders seeking an early exit, the sources said. That would imply a write-off of Air Berlin’s obligation under the structure, while Alitalia’s debt would be honoured.
Creditors unwilling to exit at a discount might swap their notes into new instruments with a higher credit rating. The notes could feature a credit enhancement in the form of a guarantee of the obligations of Air Serbia and Air Seychelles, which are part of the borrowing structure, the sources said.
The first tranche of the notes, due 2020, is rated CC by Fitch, while the second tranche due 2021 is rated C.
With an Abu Dhabi intervention, the notes would become investment grade because of the oil-rich emirate's strong credit profile, so any capital injection by the government could be partially offset by a reduction in interest payments.
Last month, the SPV said it received a bid of just over $4 million in cash for the debt obligations of Alitalia and Air Berlin across the two EAP bond tranches.
The bid included around $6 million that would become payable to the SPV in case of recovery of an equivalent amount from the obligations, and a payment of 60 percent of money recovered after a 35 percent recovery threshold was reached.
The bid had an expiry date of Aug. 31; the SPV asked the bidder to extend the deadline to give note holders time to review terms. Since then, the SPV has given no update on the bidding process.


Idle India plant victim of Modi policy moves

Updated 20 May 2019
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Idle India plant victim of Modi policy moves

  • Ban on high-value banknotes and goods and services tax has reduced demand

NEW DELHI:  It was supposed to be Johnson & Johnson’s biggest manufacturing plant in India. It was to eventually employ at least 1,500 people and help bring development to a rural area near Hyderabad in southern India.

Yet, three years after the US health care company completed construction of production facilities for cosmetics and baby products on the 47-acre site, they stand idle.

Two sources familiar with J&J’s operations in India and one state government official told Reuters production at the plant, at Penjerla in Telangana state, never began because of a slowing in the growth in demand for the products.

One of them said that demand didn’t rise as expected because of two shock policy moves by Prime Minister Narendra Modi: A late 2016 ban on then circulating high-value currency notes, and the nationwide introduction of a goods and services tax (GST) in 2017.

J&J spokespeople in its Mumbai operations in India and at its global headquarters in New Brunswick, New Jersey, declined to respond to a list of questions from Reuters.

Modi’s office did not respond to a call and an email with questions.

Aimed at rooting out corruption and streamlining the tax system, the double whammy of “demonetization” and GST, were two of Modi’s signature policy moves. But instead of encouraging economic activity as intended, they did the opposite, at least in 2016-2018, by sapping consumer demand, according to some economists.

Many businesses, especially small and medium-sized enterprises, complained publicly — some in their financial statements — that they suffered a drop off in orders. The suspended J&J project stands as one of the most vivid examples of the impact on the broader investment picture.

In the first month after demonetization, some business surveys showed that sales of products such as shampoos and soap fell more than 20 percent.

Indian Prime Minister Narendra Modi makes a press statement in New Delhi last month. (Reuters)

Lack of jobs growth and a farm-income crisis because of low crop prices have hurt Modi in the current general election, according to several political strategists.

Still, Modi and his ruling Hindu nationalist Bharatiya Janata Party are expected by many of the strategists to be in a position to get a second term — probably with support of some other parties — when votes are counted on Thursday, partly because of his strong stance on national security issues.

A range of Modi’s business policies, such as capping prices of medical devices, forcing tech companies to store more data locally and stricter e-commerce regulations have in the past two years hurt plans of American multinationals such as J&J, Mastercard, Amazon and Walmart-owned Flipkart.

The groundbreaking of the J&J facility in Penjerla, its third in the country, was carried out with much fanfare in 2014, attended by Telangana state’s Chief Minister Chandrashekar Rao, who hailed the foreign investment as a big win for local communities.

A document dated April 2017 that lists products the company planned to make at the facility, submitted to the Telangana government and reviewed by Reuters, names baby oil, baby shampoo, baby lotion, baby hair oil, face wash and creams.

Shaukat Ali, running a tea shop under a bamboo stall on barren land outside the plant, said local workers check in routinely for possible vacancies at the J&J site, but nothing has come up in years.

At the local pollution control board office, the member secretary Satyanarayana Reddy said the J&J plant had all the required approvals and he was not sure why it hadn’t started production.

“It is unusual for such a big plant to stay idle for so long,” he said. “But there is no problem from our side.”

Chandrasekhar Babu, an additional director at the Telangana industries department, said a J&J company official told him the plant hadn’t started due to lack of demand.

GST and demonetization were two key reasons the plan didn’t kick off, one of the sources said, adding that lack of consumer demand since then dented company’s plans.

The second source familiar with J&J’s plans said the company miscalculated Indian market demand.

On a recent visit by a Reuters reporter to the J&J plant, plush, furnished conference rooms and cubicles sat inactive; M. Sairam, who said he was the site manager, told Reuters production areas with machines were idle too.

Local officials had hoped the initial J&J plant would be only the beginning. After the groundbreaking in 2014, Pradeep Chandra, who was Telangana’s special chief secretary of industries, told Business Today magazine that “based on the extent of land (J&J) have acquired we believe that they are looking at much larger expansion here.”

Local media reports at the time said the J&J facility would employ some 1,500 people.

A J&J official, who was not identified by name, was reported subsequently in December 2016 in India’s Business Standard as saying that the $85 million plant would be operational by 2018 after it had overcome procedural delays. The official was quoted as saying the company had earmarked an additional $100 million for expansion.

Vikas Srivastava, the managing director of J&J Consumer (India), who was at the 2014 groundbreaking, did not respond to calls for comment.

Reuters also talked to two workers outside a sprawling Procter & Gamble facility making detergents and diapers, which is next to the J&J plant. They said they were part of the P&G plant’s production team and the plant had been running below capacity.

A P&G spokesperson denied that, saying the plant was “operating at full capacity.” 

“India is a priority market for P&G globally and in recent quarters, P&G’s business in India has registered strong double-digit growth consistently,” the company said.

The weak rural economy, where most Indians work, has also hurt growth in sales of basic items such as detergents and shampoo in the past year.

Hindustan Unilever Ltd, an industry bellwether that would compete with the likes of J&J and P&G in some categories, said its volume growth shrank to 7 percent in the quarter ended March 31, down from double-digit growth in the previous five quarters. The company warned that the daily consumer goods segment in India was “recession resistant ... not recession proof.”