Norwegian’s Last Stand

Madhu Unnikrishnan
April 12th, 2020 at 12:04 PM EDT

Call it a non-bankruptcy bankruptcy. Norwegian, no surprise, is running out of money again. The once recklessly expanding LCC, which began greatly curtailing its ambitions late last year, has no cushion at all to deal with the ravages of the Covid-19 crisis. All it does have is some government support. But it’s highly conditional support. Norway’s parliament promised an initial tranche of about $30m in aid, which the airline quickly grabbed by meeting a relatively lax condition (getting some modest new borrowing capacity from a private sector bank). This by the way, along with share sales by the company’s founders, made Norway’s government the airline’s largest shareholder.

Tranche number two is a lot bigger — about $120m — and requires Norwegian’s lenders to waive interest payments and defer principal payments. An even bigger third tranche of aid — about $150m— will be available only if Norwegian increases its capital ratio to 8%. It was just 5% on the eve of the crisis.

But how to increase its equity at a time like this? Nobody wants to buy any more of its shares. Nobody wants to buy any of its assets. Nobody wants to lend it any more money. So Norwegian will try a bold approach: Ask all holders of its outstanding bonds, and some of its aircraft providers, to convert all bond and lease debt to equity, in other words, ownership shares in the company. The airline happens to have four bond offerings held by investors, three of them secured by assets like planes and London Gatwick airport slots.

In normal times, bondholders would likely balk at any such ultimatum. They’d simply seize the assets if Norwegian refused to pay, and deploy those assets elsewhere. Today, there is no elsewhere. Demand for all aviation assets is dormant worldwide. The same equation applies to Boeing, Airbus, and aircraft lessors. If these creditors don’t accept Norwegian’s bitter proposal, the airline reasons, they could lose everything. If they do, they’ll be owners of a smaller but heathier “New Norwegian,” which management is currently planning.

At stake is the $270m promised in tranches two and three of the government aid package. With all the new equity issuance, meanwhile, existing shareholders would be left with control of just a tiny fraction of the company (less than 1%). Will Norwegian’s gambit succeed? Existing shareholders will vote at a meeting scheduled for May 4. They’ll specifically be asked to give the company’s board of directors “wide authorizations to issue new shares and convertible loans.” As for Norwegian’s first quarter performance, results won’t be released until May 28.

Madhu Unnikrishnan
April 12th, 2020 at 12:04 PM EDT

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