Portuguese Government Rescues TAP Airlines, Causing Short-term Losses for Azul

RIO DE JANEIRO, BRAZIL – The Portuguese government’s €1.2 billion (R$7.2 billion) aid package to TAP airlines will have an impact on Azul here in Brazil. The Brazilian airline, founded by David Neeleman, indirectly holds a six percent stake in the Portuguese company since the second quarter of 2019, and is also a TAP creditor, after the acquisition four years ago of a US$90 million (R$482 million) convertible bond maturing in 2026. This debt would entitle the company to an equity participation of 41.25 percent in TAP within six years.

The package should generate a negative adjustment in Azul’s balance sheet, since the Portuguese government has urged the Brazilian airline not to convert the bonds into shares. Under the agreement, the bonds will be charged until maturity to be paid as a simple debt and will no longer be convertible into a stock position. Azul was expected to disclose a significant event in this regard yesterday, after the market closed.

As a result, Azul will have to extract from its balance the future value of its possible conversion of debt into shares – another negative impact on the balance, after the loss of R$618.5 million recorded in the first quarter result. In late March, TAP’s bonds were recorded at R$937.2 million in the Brazilian company’s balance sheet. However, Azul warned that the face value of the bonds plus interest, i.e., pure and simple credit, was equivalent to R$668.5 million – the difference was due to the conversion premium estimated by Azul (R$288.7 million at that time).

Despite the immediate negative impact on the balance sheet, the government’s aid to TAP is expected to provide greater security to the prospect of receiving the credit in full. It is still too early to estimate the adjustment value, since its recording in the financial statements will also be contingent on the net calculation of the exchange rate effect. When consulted, Azul did not comment on the matter.

The Portuguese government will also buy TAP’s share held by the consortium Azul is part of, the Atlantic Gateway. The total of the consortium will be purchased for €55 million, of which about €10 million comes from Neeleman’s company. This part of the settlement relating to the Portuguese company will have a minimal impact on Azul’s financials.

For the time being, the commercial partnership between TAP and Azul is still in force. What will become of it has not yet been defined. The Portuguese company also subleases 15 aircraft from Azul, which had a receivable balance of R$ 345 million for contracts until the termination of the agreements. All aircraft lease contracts are suspended worldwide, and the final outcome of these agreements in the post-pandemic period is unknown.

By late March, Azul had just over R$23 billion due it, of which R$16 billion were in aircraft lease commitments. The company’s cash position, discounting assets linked to TAP that are not liquid, totaled just over R$ 1.2 billion.

In the coming weeks, the company is expected to launch a public offer in search of cash backup to benefit from the BNDES (National Bank for Economic and Social Development) package to airlines, but which is tied to market demand. The operations – of Azul and other companies in the sector that could raise funds under the program – will consist of 75 percent debt securities and 25 percent subscription rights in shares that, after launching, could be traded separately.

Source: Exame