Weak Brazil Real Makes Azul Bond Among Worst in Emerging Markets
Published 7 August 2024, 14:42:20.37 GMT
By Giovanna Bellotti Azevedo and Rachel Gamarski
(Bloomberg) -- Azul SA’s bonds are delivering one of the worst returns in emerging-market corporate debt as a slumping Brazilian real boosts concerns about the airline’s finances.
The real’s slide — some 14% against the dollar so far this year, the worst performance among major currencies — is adding pressure on the carrier, which was already struggling amid high interest rates and volatile fuel markets. The deteriorating scenario pushed Fitch Ratings to revise its outlook on the debt to negative last month, citing Azul’s “significant dependence” on accessing the credit market to finance its cash flows.
Azul was the only one among Brazil’s trio of dominating airlines — which also includes Latam Airlines Group and Gol Linhas Aereas Inteligentes SA — that didn’t file for bankruptcy protection after the Covid-19 pandemic upended the travel industry. Instead, the company was able to push out maturities through a bond swap offer in June 2023.
But even without any significant debt payments until 2028, Azul still grapples with lease obligations and high interest payments on its debt load. A weaker Brazilian real jacks up expenses, including those with fuel costs tied to the greenback and dollar-denominated lease payments.
“Azul at the moment is more financially tight,” said Carolina Chimenti, an analyst at Moody’s Ratings. “Any spike in dollar appreciation or oil prices will have a much greater impact on its liquidity than it will have for Latam, for example.”
Azul had a debt ratio of 5.7 times Ebitda for the 12 months ended in March 2024. Meanwhile Latam’s ratio was 2.6 times for the same period, according to Moody’s.
The carrier has been in talks with investment banks to raise additional debt capital, according to people familiar with the matter. One option would be tapping the dollar bond market, the people said, asking not to be named discussing a private matter. A dollar bond issuance would look similar to the private offering completed last year and timing would depend on the market scenario, two of the people said.
Azul declined to comment.
The company’s dollar notes due 2030 have handed investors a loss of 6.6% this quarter, while notes due 2028 fell 1.9% in the same period. That compares with an average 2% gain for corporate debt from developing nations and a 1.8% gain for similarly-dated bonds from Latam Airlines.
Brazil Dependence
Azul bonds have underperformed in part because of the airline’s dependence on Brazil, according to Josseline Jenssen, an analyst at Lucror Analytics. Latam is more geographically diversified, with around 40% of revenues from ticket or cargo sales coming from Brazil, company filings show. Azul, meanwhile, has 80% of its sales in Brazilian reais, according to Moody’s. That dependence could squeeze margins if the company is not able to pass on the FX-driven cost increase to airfares — which have already ballooned since the pandemic.
Airlines in the region have struggled with high fuel costs, shortages of aircraft and lawsuits from unhappy customers. Latam filed for Chapter 11 bankruptcy in 2020 and has since emerged from the process. Gol filed for protection from creditors in January after a dozen attempts to restructure its debt. Azul has been pursuing a merger with Gol, and both companies recently announced an agreement to connect their flight networks. In one scenario under consideration for a potential deal, Abra Group Ltd. would contribute its Gol shares to Azul in exchange for a stake in the combined airline.
To be sure, Azul has made strides in improving its credit and liquidity after it renegotiated with lessors and swapped unsecured dollar debt due in 2024 and 2026 for new secured notes due in 2029 and 2030, respectively. It also raised $800 million in fresh debt due in 2028 through a private offering in July 2023.
The bonds have been “over-punished” and have room to outperform even if the weaker real exacerbates concerns about cash flows, according to JPMorgan Chase & Co. Currency implications do not “fundamentally change the trajectory or the narrative of the business,” JP Morgan credit analyst Ian Snyder wrote in a note to clients.
Still, Azul’s free cash flow generation is expected to remain negative during 2024 and 2025, at around 1.3 billion reais and 1.5 billion reais respectively, Fitch said in a report. Expectations for negative cash flows are driven by high leasing and interest rate expenses post restructuring.
The weaker real “highlights concerns about the fragility of Azul’s balance sheet and Azul’s liquidity, and how this volatility may impact the company,” said Moody’s Chimenti. “Operationally, the company is fine, but the market is a little worried about Azul’s cash position and there is negative sentiment around Brazil,” she added.
--With assistance from Maria Elena Vizcaino.