(Bloomberg) – Embraer Azul SA cuts deals with lessors, exchanges debt and raises hundreds of millions of dollars in new cash over the past year to reverse its ill financial position.
However, its efforts have barely built confidence: U.S. dollar bonds issued a few months ago lost more than a third of their value. The stock has plunged about 87% over the past year.
“What they did wasn’t enough, and investors were facing these problems again,” said Chimenti, a Moody’s rating analyst, said. “Unless there is a structural and sustainable solution, whether through out-of-court restructuring or a truly effective restructuring, the situation remains unresolved.”
The company has started another round of conversations with bondholders because it was private negotiations and therefore asked not to be named, a person familiar with the matter said. They declined to elaborate on what is being discussed. The move even though Azul sold more equity and received new funds from creditors to increase liquidity over the past two weeks.
While Azul has not made huge payments in the short term, the bond that expired in 2028 (the worst performer in the Bloomberg Corporate Debt Index this year), the carrier faces a series of monthly lease payments for each of the next two years.
Due to ongoing inflation and high interest rates combined with exchange rate pressure, the tough economic situation in its domestic market may affect Azul’s cash position and compound dilemma.
On Tuesday, Fitch Ratings downgraded Azul to CCC-, citing limited financial flexibility and inability to improve liquidity outside of debt renegotiation with existing creditors.
In April, the airline raised 1.6 billion reais through equity supply, including mandatory debt exchange. Creditors also provided new capital of 600 million reais to support equity improvements and strengthen liquidity.
But Suno Research analyst Joao Daronco said equity products are “red flags” and the additional funding is an interim solution.
“Structural issues will continue without complex reorganizations or mergers,” he said. “The actions being made are closely related to the short term.”
Long-term solutions may be combined with their biggest competitors, Daronco said.
Azul and Abra Group, a major shareholder of Gol Linhas Aereas Inteligentes SA, have agreed to work on the merger. A deal will be approved by regulators after years of turmoil at Latin American Airlines and will only be carried out after GOL emerges from the U.S. Chapter 11 process.
GOL’s stock sank on Friday, hitting record lows in the latest attempt to withdraw from Chapter 11 by the proposed 19.2 billion Reyas ($3.4 billion) capital.
Like other Embraer, Azur has been counting on loans in the long-awaited government financial aid package to improve liquidity. The program has been in progress for more than a year and will enable airlines to use funds from the country’s National Civil Aviation Fund (FNAC) to return loans from the National Development Bank BNDES.
According to people familiar with the matter, the plan requires approval from the Brazilian National Monetary Commission, and airlines may provide up to 4 billion reais on airlines starting in August. Its capture, people say, includes ensuring that companies retain jobs and limiting dividend payments.
One of the obstacles is on collateral that the carrier can provide – airport slots and aircraft are not eligible. To fill this gap, a committee related to the Brazilian Ministry of Development said funds, usually designed to help exporters can now be used to purchase aviation fuel.
The proposal received initial approval late Thursday, but still needs to be cleared of other government agencies, which should help airlines get better credit terms to buy fuel, a statement said.
Representatives of the Ministry of Finance (part of the National Monetary Commission), the Ministry of Development did not respond to a request for comment on airline assistance.
Moody’s Chimenti has some concerns about cash flow, even if it helps. She estimates the company will have about 1.6 billion reais in December. While government funds will help Azur meet his debt obligations, liquidity is a bigger issue, she said.
“The company needs to take other steps to keep the solvent,” she said.
– Assistance with Leda Alvim.
More stories like this are available Bloomberg.com
