By Davide Barbuscia
DUBAI, Aug 16 (Reuters) - Etihad
Airways' bonds issued through a special purpose vehicle have dropped more than five points in the secondary market a day after Air Berlin, in which Etihad
has a large minority stake, filed for bankruptcy protection.
In April, the "EA Partners" bonds dropped by almost 10 cents on the dollar after workers at the Italian carrier Alitalia - in which Etihad
has a 49 percent stake - rejected the company's latest turnaround plan, blocking it from accessing rescue financing.
An "internal debt assumption" agreement between Etihad and Alitalia - revealed through a Fitch note in the days following Alitalia entering special administration, but had been signed earlier - put a floor under the bonds, and they subsequently bounced back almost to par value.
But it is unclear if a similar agreement is in place for Air Berlin , and some of EA Partners' creditors fear that after years of losses supporting the German carrier, Etihad might not cover the carrier's portion of debt in the SPV bonds.
Etihad and Air Berlin declined to comment.
"Air Berlin adds to what has been a steady stream of bad news - whether related to Alitalia or Etihad itself," said a Dubai-based portfolio manager, speaking on condition of anonymity because of commercial sensitivities.
Etihad's is undertaking a strategic review which began last year and saw it offload its minority stake in a regional European carrier in July before announcing on Tuesday it was no longer willing to prop up Air Berlin.
"The added problems don't necessarily mean help isn't still on the way for the bond, but it does it make it more complicated. The bond's credit enhancement has limits, and so does the appetite for bailouts," the portfolio manager said.
Yields on the notes - a $700 million bond maturing in 2020 and a $500 million bond maturing in 2021 - jumped by more than 2 percentage points after Air Berlin's bankruptcy announcement. The 2021 had a bid yield of 11.5 percent on Wednesday, up from 9.1 percent before the announcement. The 2020 notes were quoted at 12.3 percent on Wednesday, from 9.4 percent on Monday.
The EAP bonds include Etihad and several other airlines partially-owned by the Abu Dhabi carrier. The bond proceeds were used to enter into separate debt obligations with the entities involved, which included Etihad Airways, Etihad Airport Services, Alitalia, Air Berlin, and other airlines such as Air Serbia and Air Seychelles.
The bond had no cross-default provision, and according to their structure none of the SPV partners is legally obliged to support other partners in the event of a default. However, the paper is generally perceived as Etihad's credit, to the point that traders and portfolio managers have assumed in the past that reputational considerations could push the Abu Dhabi-owned company to bail out other SPV members, should the need arise.
According to Air Berlin's 2016 annual report published in April, Etihad confirmed by letter its intention to provide the necessary support to Air Berlin to enable it to meet its financial obligations for a period of 18 months from April 28.
However, it is not clear to what extent the letter is binding, and whether creditors can rely on it. The bonds are due beyond the 18 month period indicated in the letter, said an investment analyst at a hedge fund in London.
An independent auditor in the same report said: "The group is reliant on a letter of support from a significant shareholder; as with such letters there remains a doubt whether this can be enforced in the event that such a need arises."
In the absence of some official announcement from the companies involved, the bonds are likely to drift, said the analyst. "Now that Etihad has given up on Air Berlin, they could distance themselves from the debt assumption agreement with Alitalia too," he added.
(Additional reporting by Alexander Cornwell in Dubai and Victoria Bryan in Berlin, editing by David Evans) ((Davide.Barbuscia@thomsonreuters.com;))