Azul is racing to raise funds as part of a deal reached last week with its aircraft lessors. The plan was a key step in the Brazilian airline’s attempt to address its debt obligations.
The company managed to close an agreement with lessors and parts suppliers that reduces its debt by R$3 billion in exchange for 100 million new preferred shares. The announcement caused shares to rise as much as 22%.
But the impulse proved short-lived. The stock rose by less than 1% this week and continues to fall by more than 60% this year, the worst performance of the Ibovespa.
Although welcomed by investors, the agreement does not provide the new capital that Azul needs to reinforce its liquidity. And the deal itself depends on the company obtaining new resources, said Carolina Chimenti, an analyst at Moody’s Ratings.
“Money remains essential,” he said. “This renegotiation was the first step to avoid Chapter 11 and the company continues to work.”
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The situation highlights Azul’s delicate financial position. It is the only airline of the three that dominate the Latin American market that has avoided asking for protection from creditors. But it has struggled to strengthen its balance sheet and deal with the impact of the rising dollar, despite having renegotiated with lessors and carried out a debt swap that pushed its maturities forward.
This month, they are due about $68 million in bond payments, according to Moody’s, which analysts say the company can handle. As of June 30, Azul had R$1.5 billion in debt maturing in the short term and around R$1.4 billion in readily available cash, according to Fitch Ratings.
Dollar bonds due in 2030 have handed investors some of the worst losses among emerging market corporate debt this year. Bonds due in 2028 gained 2.7% when accounting for price changes and interest payments, but still lag their peers, according to data compiled by Bloomberg.
By carrying out a debt-for-equity swap with lessors and suppliers, Azul aims to open the door to additional financing, including raising up to $400 million in debt through its cargo unit, people familiar with the matter said. Those attempts, however, have run into obstacles due to questions about what can be used as collateral, said the people, who asked not to be identified because the information is not public.
Meanwhile, the company continues to talk to its dollar bondholders for additional financing, the people added. It could also turn to a recently approved Brazilian government program designed to help airlines.
Azul declined to comment.
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Pedro Bruno, an analyst at XP Investimentos, said that the agreement with the lessors is a positive point that allows Azul to avoid a subsequent share offering, which “removes the obligation of a much more relevant dilution”.
Still, Amalia Bulacios, an analyst at S&P Global Ratings, said the company needs to improve its liquidity, which will be a challenge in a tight market. S&P lowered Azul’s rating to CCC+ in September, one of three rating downgrades last month due largely to weak liquidity and refinancing risks.
“The company’s capital structure is a little heavy,” she said.
Bloomberg reported in August that Azul evaluated options, including a follow-on stock offering and a Chapter 11 filing. The company said in a regulatory filing that it was analyzing options, including selling debt through its cargo unit, and that it would prefer “commercial solutions”.
“They don’t want to go into Chapter 11, but if the company can’t raise the money, I can’t rule out Chapter 11 being an option,” said Josseline Jenssen, credit analyst at Lucror Analytics.
