Latam catches tailwind with dollar offering
Created in 2012, Latam has become Latin America’s leading airlines group. Efforts to manage its debt suffered a false start in 2016 but, as David Wigan reports, earlier this year its bond offering took off.
Latam Airlines Group was created out of a $3.5bn stock-swap transaction between Chile’s LAN Airlines and Brazil’s TAM in 2012. It has gone on to become Latin America’s leading airline, offering services to about 140 destinations, employing 44,000 people and transporting 67 million passengers a year.
Its creation five years ago led to a significant operational challenge as the companies unified fleets, networks and systems. Only in May 2016 did the first Latam-branded aircraft embark on a commercial flight. Along the way, the group faced a challenging economic environment, particularly in Brazil, where the economy shrank 3.6% in 2016 as the country endured its worst recession on record.
On the up
Nevertheless, the group invested considerably, resulting in one of the youngest fleets in the world; the average age of its 303 planes is about seven years. To manage the company’s debt profile, Latam executives decided in late 2016 to implement a liability management exercise, and subsequently launched a tender offer for a TAM $300m bond maturing in April of this year and a $500m callable bond due in June 2021.
“We did a tender offer subject to successful issuance of a new bond targeting the 2017s and 2021s, but got very little traction,” says Andrés del Valle, senior vice-president of corporate finance at Latam.
“Our plan was to sell a 2024 bond to extend our maturity profile, but because the tender offer did not go as planned we withdrew,” he says. However, press reports at the time drawing a connection between the US election and Latam's decision not to proceed with the 2024 bond were mistaken, according to Mr del Valle.
Unsecured bonds comprise a minor slice of Latam's capital structure, which like many airlines is dominated by secured loans. About 78% of the company’s total debt is made up of asset-backed bank finance. One reason is its ownership of aircraft, which are of a high quality and considered mobile assets, making them ideal collateral for bank loans. Secured financing also comes in at a lower cost than unsecured financing, and Latam's weighted cost of debt is lower than 4%, despite the coupons on its bonds being about 7%.
Latam's last bond issue was in 2015, when it sold a $500m security due in 2020, which at the time was rated by Moody’s as sub-investment grade Ba3 with a 'stable' outlook. Moody’s said the rating could come under pressure if margins declined or if adjusted leverage exceeded six times for a sustained period. In March 2015 leverage was 5.6 times.
“Given the challenging macroeconomic environment in Brazil, our EBIT margin [ratio of earnings before interest and taxes to net revenue] was about 5% in 2015, but we deferred some capital expenditure and we saw margins rise to 6% in 2016, and this year we are looking at 6% to 8%,” says Mr del Valle. “Also at the end of 2016, we received a $608m capital increase from Qatar Airways, which meant our leverage fell to 5.3 times.” Qatar Airways owns 10% of Latam.
Perfect timing
At the beginning of 2017, the company was looking at debt repayments for the year of about $1.5bn. At the same time, executives wanted to maintain the healthy liquidity position it had reached at the end of 2016, with cash at 19% of the past 12 months’ revenues.
“The cyclical nature of the airline industry means it’s fairly normal to ensure high levels of liquidity are always available,” says Mr del Valle. “And we decided that it would make sense if we were to maintain our cash position by refinancing about half of the $1.5bn.”
With Latin America’s economy recovering and its financial performance gaining momentum, in early 2017 Latam was approached by numerous banks, which advised that conditions were right for another run at the bond market.
At the beginning of March, the company went ahead and mandated Bank of America Merrill Lynch and Credit Suisse as global coordinators, supported by BTG Pactual, Natixis, Santander and BNP Paribas as joint bookrunners.
More mature, bigger deal
In line with its earlier plans, the company aimed to extend its maturity profile, and set out to launch a $500m 144A/Reg S seven-year non-call four bond maturing in 2024.
“It was an incredibly quick process, in which we completed our mandate and regulatory obligations, and then went on a six-city roadshow in just four weeks,” says Mr del Valle. “We saw 70 accounts and the deal priced on April 6.”
The bond was more than seven times oversubscribed, and after receiving $3.7bn of orders Latam decided to increase the deal size to $700m, which it was able to do without lifting the bond’s 6.875% coupon.
“The sale was a key element of our plan to maintain our cash liquidity ratio and shift our maturity profile,” says Mr del Valle. “The sub-7% coupon brought down the average cost of our unsecured debt and the deal puts us in a great position to move forward.”
