AirBaltic bond's interest rate is deemed high yet suitable by experts' assessment
In a challenging financial landscape, airBaltic, the Latvian national airline, has closed a last-minute refinancing deal with a high interest rate. The interest rate of 14.5% for airBaltic's 5.25-year covered bonds is considered high due to the high level of risk associated with the company.
Investors have assessed airBaltic's parameters and seen higher risks, leading them to ask for a premium for the risk they are taking. This high interest rate makes airBaltic's loan cost around €45 million in interest, according to Andrejs Martinovs, Chairman of INVL Pension Funds.
The State will contribute only €50 million to airBaltic's refinancing deal, with the remaining €340 million being raised through the issuance of covered bonds. Demand for these bonds exceeded supply, with final orders exceeding €840 million. Transport Minister Kaspars Briškens expressed delight that the market demand for these bonds has more than doubled the target amount.
However, airBaltic has not yet become a company that consistently makes a stable profit to repay all its borrowings. The risk for airBaltic lies in its credit risk and its ability to repay borrowed funds. Investors consider airBaltic a risky investment due to its overall situation and the expectation that it will not significantly improve.
Girts Rungainis, an investment banker and member of Prudentia's Supervisory Board, stated that the air transport industry has been a loss-making one for both society and investors. Rungainis expected the interest rate for airBaltic's refinancing deal to be even higher before this deal.
Andrejs Martinovs, Chairman of INVL Pension Funds, expressed doubts about whether additional loans to airBaltic will be beneficial. He noted that airBaltic has not been able to attract investors at a lower rate, leading it to borrow from those willing to lend at higher rates. The interest rate on airBaltic's bonds is currently the highest offered on the European bond market this year.
Interestingly, the name of the investment banker who is a member of the board of the company Prudentia and commented on the interest rate for the airBaltic bonds is not explicitly mentioned in the provided search results. The interest rate on airBaltic's bonds is comparable to instant loan rates, highlighting the high-risk nature of the investment.
Despite these challenges, airBaltic has managed to avoid the need for significant public funding by issuing covered bonds. Whether this refinancing deal will set airBaltic on a path towards financial stability remains to be seen.
