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Air China shows strain of large airline debt
Source: Bloomberg News |
September 4, 2012, Tuesday
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Print Edition
Print Edition
AIR China, the world's most-indebted airline, plans its first domestic bond sale in three years as earnings plunge on a double-whammy of slowing economic growth and a weaker yuan.
The carrier, which owes US$14.2 billion, said last week that it will sell as much as 10 billion yuan (US$1.6 billion) of securities maturing in up to 15 years, half of which will be offered this year. The yield on its 2014 paper rose 40 basis points in August, the most in 13 months, to 4.07 percent, data compiled by Bloomberg News show. That on 2016 notes of Air France KLM, the second most-indebted with US$13.5 billion in borrowings, fell 30 basis points to 5.92 percent.
A slump in travel demand across the globe and higher fuel costs drove a 77 percent slide in Beijing-based Air China's first-half earnings. Capital expenditure exceeded cash from operations, causing an outflow of 1.4 billion yuan in 2011 and an estimated 6.1 billion yuan this year, data compiled by Bloomberg News show.
"Judging from its first-half results, its operating cash flow isn't looking too good," said Davin Wu, a transportation analyst at Credit Suisse Group AG in Hong Kong. "Air China has plans to add 55 planes each year until 2014. That's where it'll need the money."
Worldwide combined profit for the airline industry may plunge to US$3 billion this year from US$7.9 billion in 2011, the International Air Transport Association said on June 11. The group cut its 2012 forecast for Asia-Pacific carriers' profit to US$2 billion from US$2.3 billion. Willie Walsh, the chief executive officer of International Consolidated Airlines Group SA, parent of British Airways, said in a June 13 interview in Beijing that some carriers may fail this year and next.
Shares in Air China slumped 24 percent in Shanghai this year as first-half net income fell to 944.5 million yuan from 4.06 billion yuan a year ago. Southern Airlines on August 27 posted an 85 percent slump in profit that was larger than expected, while earnings of China Eastern Airlines tumbled 65 percent.
Air China's debt climbed to 1.7 times its equity on June 30 from 1.5 times at the end of last year, the company said. That is higher than an average for its peers of 0.9 times and the 0.4 percent for Hong Kong's Hang Seng Index, according to Bloomberg News data.
While the debt level has climbed, the bond sale will succeed as Air China's financial status is "very healthy," Cheng Fan, its chief financial officer, said at an earnings briefing in Hong Kong last Thursday. The nation's largest international carrier plans to use proceeds from the sale to "repay bank loans and replenish cash for future development," Fan said.
Widening the gap
The yield on Air China's bonds rose for a 13th day through Thursday, the longest streak since November 2010, widening the gap with the benchmark yield on 10-year government bonds to 67 basis points from a 2012 low of 19 basis points on June 15, according to Bloomberg News data.
The benchmark Chinese treasury yield climbed 10 basis points last month to 3.39 percent. The average yield for similar-maturity AAA corporate debt tracked by Chinabond increased 15 basis points to 5.07 percent.
"People are losing confidence," said Patrick Xu, a senior research analyst at Barclays Capital in Hong Kong. "The risk for Air China's bond buyers is linked to the earnings slowdown. Still, airline companies are seeing an earnings drop this year almost across the board."
Airlines are substantial dollar borrowers and a weakening currency makes it more expensive in yuan terms for them to meet debt payments on aircraft and pay fuel bills denominated in the greenback. Air China said last week that it booked a net exchange loss of 339 million yuan for the first half of 2012, compared with a 1.51 billion yuan gain a year earlier.
China Southern, Asia's biggest carrier by passengers, reported a similar loss of 314 million yuan, compared with a 1.24 billion yuan gain a year earlier, while China Eastern, the nation's second-biggest airline, made a 228 billion yuan exchange loss versus a year-earlier profit.
Twelve-month non-deliverable forwards on China's currency traded at a 1.6 percent discount to the Shanghai spot rate last week, the most since March 2009. The yuan has fallen 0.9 percent against the dollar this year, as the slowest economic growth in three years curbed capital inflows. That compares with a 4.7 percent gain in 2011.
"The volatility between yuan and dollar is increasing," Fan said. "We are issuing yuan bonds because a lot of our operating expenses are denominated in yuan and we are trying to reduce the impact from currency fluctuations."
The People's Bank of China has cut the one-year lending rate twice in June and July by a quarter percentage point each to 6 percent to support growth that slowed to 7.6 percent last quarter, the least since 2009.
The cost of insuring China's sovereign bonds using five-year credit-default swaps fell 8 basis points this month to 105 in New York, according to data provider CMA.
The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government fails to adhere to its debt agreements.
Government subsidies
The government aims to help domestic airlines issue bonds to boost growth, it was reported on July 13, according to State Council guidelines. China Eastern said in June it will offer its first domestic bonds.
A finance ministry statement in April said the government will subsidize cargo and regional aviation, international air routes and small airports through an aviation development fund from April 1.
"Borrowing more in yuan is prudent given that their main revenues are in the currency and as that helps net off some dollar debt and reduces foreign-exchange exposure," said Xu at Barclays. "Air China is a national flag carrier and it still has some sovereign credit background and the default risk is very low."
The carrier, which owes US$14.2 billion, said last week that it will sell as much as 10 billion yuan (US$1.6 billion) of securities maturing in up to 15 years, half of which will be offered this year. The yield on its 2014 paper rose 40 basis points in August, the most in 13 months, to 4.07 percent, data compiled by Bloomberg News show. That on 2016 notes of Air France KLM, the second most-indebted with US$13.5 billion in borrowings, fell 30 basis points to 5.92 percent.
A slump in travel demand across the globe and higher fuel costs drove a 77 percent slide in Beijing-based Air China's first-half earnings. Capital expenditure exceeded cash from operations, causing an outflow of 1.4 billion yuan in 2011 and an estimated 6.1 billion yuan this year, data compiled by Bloomberg News show.
"Judging from its first-half results, its operating cash flow isn't looking too good," said Davin Wu, a transportation analyst at Credit Suisse Group AG in Hong Kong. "Air China has plans to add 55 planes each year until 2014. That's where it'll need the money."
Worldwide combined profit for the airline industry may plunge to US$3 billion this year from US$7.9 billion in 2011, the International Air Transport Association said on June 11. The group cut its 2012 forecast for Asia-Pacific carriers' profit to US$2 billion from US$2.3 billion. Willie Walsh, the chief executive officer of International Consolidated Airlines Group SA, parent of British Airways, said in a June 13 interview in Beijing that some carriers may fail this year and next.
Shares in Air China slumped 24 percent in Shanghai this year as first-half net income fell to 944.5 million yuan from 4.06 billion yuan a year ago. Southern Airlines on August 27 posted an 85 percent slump in profit that was larger than expected, while earnings of China Eastern Airlines tumbled 65 percent.
Air China's debt climbed to 1.7 times its equity on June 30 from 1.5 times at the end of last year, the company said. That is higher than an average for its peers of 0.9 times and the 0.4 percent for Hong Kong's Hang Seng Index, according to Bloomberg News data.
While the debt level has climbed, the bond sale will succeed as Air China's financial status is "very healthy," Cheng Fan, its chief financial officer, said at an earnings briefing in Hong Kong last Thursday. The nation's largest international carrier plans to use proceeds from the sale to "repay bank loans and replenish cash for future development," Fan said.
Widening the gap
The yield on Air China's bonds rose for a 13th day through Thursday, the longest streak since November 2010, widening the gap with the benchmark yield on 10-year government bonds to 67 basis points from a 2012 low of 19 basis points on June 15, according to Bloomberg News data.
The benchmark Chinese treasury yield climbed 10 basis points last month to 3.39 percent. The average yield for similar-maturity AAA corporate debt tracked by Chinabond increased 15 basis points to 5.07 percent.
"People are losing confidence," said Patrick Xu, a senior research analyst at Barclays Capital in Hong Kong. "The risk for Air China's bond buyers is linked to the earnings slowdown. Still, airline companies are seeing an earnings drop this year almost across the board."
Airlines are substantial dollar borrowers and a weakening currency makes it more expensive in yuan terms for them to meet debt payments on aircraft and pay fuel bills denominated in the greenback. Air China said last week that it booked a net exchange loss of 339 million yuan for the first half of 2012, compared with a 1.51 billion yuan gain a year earlier.
China Southern, Asia's biggest carrier by passengers, reported a similar loss of 314 million yuan, compared with a 1.24 billion yuan gain a year earlier, while China Eastern, the nation's second-biggest airline, made a 228 billion yuan exchange loss versus a year-earlier profit.
Twelve-month non-deliverable forwards on China's currency traded at a 1.6 percent discount to the Shanghai spot rate last week, the most since March 2009. The yuan has fallen 0.9 percent against the dollar this year, as the slowest economic growth in three years curbed capital inflows. That compares with a 4.7 percent gain in 2011.
"The volatility between yuan and dollar is increasing," Fan said. "We are issuing yuan bonds because a lot of our operating expenses are denominated in yuan and we are trying to reduce the impact from currency fluctuations."
The People's Bank of China has cut the one-year lending rate twice in June and July by a quarter percentage point each to 6 percent to support growth that slowed to 7.6 percent last quarter, the least since 2009.
The cost of insuring China's sovereign bonds using five-year credit-default swaps fell 8 basis points this month to 105 in New York, according to data provider CMA.
The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government fails to adhere to its debt agreements.
Government subsidies
The government aims to help domestic airlines issue bonds to boost growth, it was reported on July 13, according to State Council guidelines. China Eastern said in June it will offer its first domestic bonds.
A finance ministry statement in April said the government will subsidize cargo and regional aviation, international air routes and small airports through an aviation development fund from April 1.
"Borrowing more in yuan is prudent given that their main revenues are in the currency and as that helps net off some dollar debt and reduces foreign-exchange exposure," said Xu at Barclays. "Air China is a national flag carrier and it still has some sovereign credit background and the default risk is very low."
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