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British Airways & easyJet: UK Export Finance's new form of state aid

Analysis

On 31-Dec-2020 IAG announced that its subsidiary British Airways had received commitments for a GBP 2 billion five-year term loan facility underwritten by a syndicate of banks. On 8-Jan-2021 easyJet announced a GBP1.4 billion five year facility, also underwritten by a syndicate of banks.

The unusual feature in both loans is that they are partially guaranteed by UK Export Finance (UKEF), an arm of the UK government.

Such loan guarantees to UK exporters mark a strategic shift for the UK's export credit agency towards more direct support. In the past, its support has typically been indirect, through guarantees provided to foreign buyers of UK-produced goods and services, with direct support to UK exporters generally focused on smaller businesses.

UKEF has long supported the UK aerospace sector's exports through credit guarantees and loans to foreign airlines buying from UK exporters. Loan guarantees to UK airlines are an innovation, offering BA and easyJet a new way to benefit from indirect state support.

Summary

  • Historically, most UKEF support has been to foreign buyers, with direct support to UK exporters mainly for SMEs.
  • The aerospace sector is a leading exposure for UKEF, until now focused on supporting foreign airlines to buy UK aerospace goods and services.
  • UKEF is expanding direct support for UK exporters and enabling higher value transactions in response to the coronavirus crisis.
  • BA's loan improves its liquidity, but its parent IAG plans more debt-raising.
  • EasyJet will improve its liquidity and refinance some short term debt.

British Airways and easyJet also had loans guaranteed by the UK's Covid Corporate Financing Facility in 2020

Both BA and easyJet benefited from GBP600 million loans guaranteed by the UK government's Covid Corporate Financing Facility (CCFF) in the spring of 2020.

As with the CCFF, the UK government does not provide the funds for loans under the new UKEF scheme. Cash comes from a commercial lender, but the government supports the transaction with a state-backed guarantee.

Neither scheme is tailored to the airline sector, but is available to qualifying UK companies.

Most UKEF support is to foreign buyers

UKEF is a UK government agency, which provides export credit to support UK exporters.

The agency has been doing this for a long time, but it is more commonly known for supporting exporters through credit guarantees and direct loans to foreign buyers, rather than the provision of large facilities direct to exporters.

In 2019/2020, 67% of the value of products issued by UKEF was in the form of buyer credit guarantees and 17% was direct loans to buyers, according to its annual report.

UK Export Finance: 2019/2020 product use by value of maximum liability to UKEF

 

Direct support to UK exporters was previously for SMEs

Historically, where it has provided working capital support direct to exporters, this has tended to be directed at SMEs and in relatively small values.

In 2019/2020, 77% of companies supported by the agency were SMEs.

UK Export Finance: companies supported by size, 2019/2020

 

UKEF helps foreign airlines to buy UK aerospace goods and services

UKEF has had a long-standing role in the aviation/aerospace sector. According to its annual report, its largest risk concentration is in aerospace, accounting for 27% of its total amount at risk as at 31-Mar-2020.

In 2019/2020 it provided GP665 million of buyer financing support to assist UK-based manufacturers and MRO providers. This was 16% of the total value of support provided by the agency last year, but this was focused on foreign airlines.

For example, it supported the financing of two Rolls Royce-engined 787 aircraft for El Al Airlines last year, and has supported a total of 18 such aircraft deliveries to a range of airlines.

Together with French and German export credit agencies, UKEF supported the delivery of six Airbus A380s to Emirates in 2019/2020, and two A330neos to Air Senegal.

In partnership with the US agency Ex-Im bank, UKEF also supported engine overhaul work carried out by GE in the UK.

UKEF is expanding direct support for UK exporters…

UKEF's arrangements with BA and easyJet have been provided under its Export Development Guarantee (EDG) scheme. This is a relatively new product for the agency, aimed at increasing the support available to qualifying UK exporters in response to the coronavirus crisis.

Unlike other UKEF products aimed directly at exporters, the EDG is not tied to a specific exporting contract.

The scheme is available to exporters carrying on business in the UK, whether manufacturers or service providers, whose export sales are at least 20% of annual turnover in any one of the previous five years, or at least 5% in each of the past three years.

UKEF provides partial guarantees of up to 80% of the value of the loan for a maximum repayment period of five years.

…enabling higher value transactions

Moreover, it provides larger sums than are typically available under other UKEF schemes that directly support exporters.

The agency expects the average value of EDG transactions to be between GBP100 million and GBP500 million. This compares with up to GBP25 million under its General Export Facility.

As a result, EDG will take in larger companies and enable larger loans. The first transaction under this scheme was to support a loan to the car manufacturer Jaguar Land Rover in 2019. UKEF now plans to roll out this product more widely.

The loans backed for BA and easyJet are very much larger than the range envisaged for average values under the scheme.

They are also unusual in being examples of large export finance support to exporters that are not manufacturers and in directly financing UK airlines (rather than supporting foreign airlines buying UK-built equipment).

BA's loan improves its liquidity, but parent IAG plans more debt raising

BA expects to draw down the facility in Jan-2021 and can repay the loan at any time. The agreement comes with covenants, including restrictions on dividend payments by BA to its parent IAG.

The loan improves BA's available liquidity and buys the airline more time to negotiate its way through depressed and uncertain demand conditions until COVID-19 vaccination programmes can start to restore some sort of normality.

As a group, IAG had total available liquidity, comprising cash and undrawn facilities, of EUR8.0 billion. In Oct-2020 the group raised EUR2.7 billion through a rights issue of new shares, and it has also increased its borrowings.

It expects to add further to its current levels of liquidity by raising more debt.

EasyJet will refinance some short term debt…

EasyJet's facility, when drawn, will be secured on aircraft in its fleet. In addition to increasing its available liquidity, easyJet will use part of the proceeds to refinance GBP400 million of short term debt in the form of a fully drawn revolving credit facility.

EasyJet has secured more than GBP4.5 billion in liquidity since the start of the COVID-19 pandemic.

Among other funding initiatives, EasyJet has raised GBP600 million through the UK's CCFF, GBP416 million through new shares, and more than GBP1.0 billion through aircraft sale and leaseback transactions, in addition to other debt facilities.

EasyJet will consider further funding opportunities according to need. As of early Nov-2020, after its last announcement of aircraft sale and leasebacks, it had 141 fully owned and unencumbered aircraft, or 41% of its fleet.

…but has restrictions on dividend payments

As with BA, the new facility includes restrictions on dividend payments. This is potentially more significant for easyJet, whose shares are listed on the stock exchange, but the LCC says that the restrictions are "compatible with easyJet's existing dividend policy".

EasyJet's policy is to pay 50% of its headline profit after tax as dividends, with no dividend when it makes a loss. It made a loss in its last financial year, ended 30-Sep-2020, and is expected to make another loss in FY2021 (source: marketscreener.com - S&P Global Market Intelligence).

The dividend restriction could become more awkward if the facility remains in place when easyJet returns to profit, but that will be a good problem to have, from today's standpoint.

BA and easyJet are significant exporters, now fully embraced by UKEF

Some people may not think of airlines when considering companies that are major exporters.

However, easyJet generated GBP3.0 billion in revenue from outside the UK in FY2020 (62% of its total sales). For BA, the figure was GBP6.7 billion in the year to Dec-2019 (51% of the total). These numbers indicate the two airlines' significance to the UK economy as exporters.

UKEF states that its mission is to "ensure no viable UK export fails for lack of finance or insurance from the private sector". The COVID-19 crisis has increased the risk to private sector financiers in lending to airlines.

Bringing airlines directly into the UKEF's orbit helps to ensure that private sector finance is more forthcoming, as the risk to financiers is lowered. But the terms of the loan and the related covenants are on a commercial basis.

BA and easyJet must still remain viable businesses, service the debt and repay it at the end of the term. This is not an open-ended commitment along the lines of the French government indicating that it will do whatever it takes to ensure the survival of Air France.

Nevertheless, the two biggest UK-based airlines are no doubt relieved to have the new UKEF scheme available. 

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