Azul’s Financial Overhauls Do Little to Quell Investor Worries

(Bloomberg) — Brazilian airline Azul SA has cut deals with lessors, exchanged its debt and raised hundreds of millions in fresh cash in the past year in a bid to turn around its ailing finances. 

And yet, its efforts have done little to build confidence: Dollar bonds issued just months ago have lost more than a third of their value. The stock has slumped about 87% in the past year. 

“What they did was not enough, and investors are faced with these concerns again,” said Carolina Chimenti, an analyst at Moody’s Ratings. “Unless there is a structural and sustainable solution, whether through an out-of-court reorganization or a truly effective restructuring, the situation remains unresolved.”

The company has already started another round of conversations with bondholders, according to a person familiar with the matter, who asked not to be named because the talks are private. They declined to elaborate on what is being discussed. The move comes even as Azul sold more equity and got fresh funds from creditors to shore up liquidity in the past two weeks. 

While Azul doesn’t have large payments due in the short term on its bonds due in 2028 — the worst performers in a Bloomberg index of corporate debt this year — the carrier faces a series of monthly lease payments which Moody’s estimates at around 5 billion reais ($875 million) in each of the next two years. 

Difficult economic conditions in its home market amid persistent inflation and high interest rates, plus exchange rate pressures, can affect Azul’s cash position and compound woes. 

On Tuesday, Fitch Ratings downgraded Azul to CCC-, citing limited financial flexibility and inability to improve liquidity outside debt renegotiations with existing creditors.

In April, the airline raised 1.6 billion reais through an equity offering that included a mandatory debt-to-equity conversion. Creditors also provided 600 million reais in fresh capital to backstop the equity raise and strengthen liquidity. 

But Joao Daronco, an analyst at Suno Research, said the equity offering was a “red flag” and the additional funds raised were a temporary fix. 

“The structural issue will continue without a complex restructuring or a merger,” he said. “The move that is being made is very much tied to the short term.”

The longer-term solution may be a tie up with its biggest rival, Daronco said. 

Azul and Gol Linhas Aereas Inteligentes SA’s principal shareholder Abra Group have agreed to work toward a merger. A deal, which would follow years of upheaval for Latin American airlines, is subject to regulatory approval and can only go forward after Gol emerges from a Chapter 11 process in the US. 

Gol’s stock sank on Friday, hitting a record low after a proposed 19.2 billion reais ($3.4 billion) capital increase in its latest attempt to exit Chapter 11. 

Like other Brazilian airlines, Azul has been counting on loans from a long-awaited government financial aid package to boost liquidity. That plan, which has been in the works for more than a year, would allow the airline to use funds from the country’s national civil aviation fund (Fnac) to back loans from national development bank BNDES. 

The program, which needs approval from Brazil’s National Monetary Council, would likely make as much as 4 billion reais available to airlines starting in August, according to people familiar with the matter. It has catches including guarantees the companies keep jobs and limit dividend payments, the people said. 

One of the snags has been on collaterals the carriers can provide — airport slots and planes are not considered eligible. In order to try to fill that gap, a committee tied to Brazil’s Development Ministry said that a fund normally geared at helping exporters can now be used for the purchase of aviation fuel.

The proposal, which got the initial approval late Thursday but still needs to clear other government bodies, should help airlines get better credit conditions for buying fuel, according to a statement. 

Representatives of Finance Ministry — which is part of the National Monetary Council — and Development Ministry didn’t reply to requests for comment on airline aid.

Even with that help in the works, Moody’s Chimenti says there are concerns about cash flow. She estimates the company will have about 1.6 billion reais available in December. And while the government funding would help Azul honor its debt obligations, liquidity is a bigger concern, she said. 

“The company needs to take additional initiatives to remain solvent,” she said. 

–With assistance from Leda Alvim.

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