With the exceptional decline in demand and revenue, a number of European airports have had to push through, or are going through, some form of covenant waiver and liquidity solution with their lenders, and most banks and PP/institutional lenders are being constructive. However, the question remains: will the capital structure of some of these airports be fit for purpose in the next year or two?
Notwithstanding a potential increased desire in Europe for domestic travel, it is safe to assume that there will be a material recovery in passenger demand for international travel - although it may take some time until we reach pre-pandemic levels. Additionally, the make-up of airlines will largely be the same, as we are seeing most major European airline carriers attempting to access the private market (e.g. Virgin Atlantic), or if needed, receiving state-backed funding (e.g. Air France KLM, British Airways, Lufthansa), although this funding does come with added government control. Equally, there appears to be some form of retrenchment from airlines assessing their bottom lines and realising they do not need to be in every airport, competing for every position.
The question therefore arises as to whether the power has somewhat shifted, with airports having less of a commanding position. For example, Gatwick Airport has seen Virgin Atlantic announce the closing of its operation there, and British Airways is threatening to do the same. As such, we expect regional airports to be impacted materially, with further developments playing out over the coming months and years, and some airports potentially having to right size their capital structure in the future.
Green shoots
We are now seeing green shoots in the debt market returning, buoyed by increasing hope that a vaccine may be on the horizon, particularly following the recent news from AstraZeneca who announced that they may be ready to supply a potential vaccine by September 2020 (supported by over $1 billion in funding from the US). The EU has continued to increase its state level support, with the ECB’s introduction of PELTRO and Chancellor Merkel and President Macron agreeing to a €500 billion recovery fund, in addition to the Bank of England’s consideration to implement negative rates to boost lending and economic activity. However, the question remains whether this will be beneficial or more harmful to retail-orientated UK banks. With this positivity, the 'new normal’ pricing is beginning to be understood, Z-spreads on the EUR Infra BBB IBOX are stable at 160 basis points, European BBB regulated power and utilities in the 100-150 basis points range, a material tightening of sub-IG spreads across both US and Europe, with the iTRAX Crossover tightening by 80 basis points to 461 basis points.
The leveraged finance market has opened up. Bridgepoint-backed financial broker, Financiere CEP, launching a syndication of a €775m cov-lite term loan B, and in the secondary, both Apoca and Parques Reunidos have placed a €60 million and €200 million term loans respectively, albeit at pricing of E+725 basis points and E+750 basis points, and at estimated yields of >7%, including fees / floors (versus the existing margins of E+325 basis points, and E+375 basis points). This pricing may be too competitive for some issuers but reflects the reality of secure liquidity in a market becoming available, and assess the long term implications of COVID-19. Within infrastructure, with relatively flat Z-spreads for IG issuers and record-low long terms base rates, we are seeing a slight uptick in longer dated PP issuance. Yet, there is certainly not the depth for large deals in the PP market just yet and, as seen from VTG, there is a need for some borrowers to bridge issuance with bank debt.
Open for business
Throughout the summer, we will see the lender's ‘open for business’ sentiment put to the test. While we are over the initial influx of covenant / undrawn requests, lenders will have or continue to cite ongoing capacity constraints. In addition, we are seeing more of a domestic focus from banks, with many focussing on only lending to their own territories.
However, PP / institutionals issuers do not have the same issue as they are tied to their fund mandates, which will not change over the course of a few weeks but instead will face increased FX hurdles with no appetite for the more esoteric jurisdictions.
The questions remains as to whether we are able to complete transactions as quickly as we did before COVID-19. Though it is possible, it is more difficult, particularly as lenders may be less likely to be disciplined. We would therefore advise adjusting to the new economic climate, acknowledging fewer lenders are likely to partake in every process and to prepare adequately for any potential financing.
DC Advisory are always at hand to discuss the market and other opportunities should you have any questions.
