Exclusive-Latvia's airBaltic seeks new financing from bondholders as debt woes worsen

By Alessandro Parodi

July 15 (Reuters) - Latvia's airBaltic will seek short-term financing from bondholders at an August 3 meeting, according to a company notice seen by Reuters, as the state-backed airline races to stabilise its finances and avert the risk of default.

The carrier, backed by Germany's Lufthansa, is seeking "interim financing" while it reviews its capital structure, the previously unreported notice sent to bondholders shows.

"In order to ensure that the Group has a stable platform while this process is undertaken, the Issuer intends to seek interim financing to ensure it has sufficient liquidity going forward while it conducts the Review," the notice read.

"Each Bondholder shall have the opportunity to participate in the Interim Financing."

The notice did not specify how much funding the airline intends to raise. AirBaltic did not immediately respond to a request for comment.

AirBaltic's financial strains highlight how rising costs since the start of the Iran war in late February have exposed structural issues at some airlines, fuelling investor concerns about their ability to meet debt obligations.

The carrier, which operates a fleet of 55 Airbus A220-300 aircraft and aims to almost double that number by 2030, has repeatedly postponed plans for a stock market listing because of engine delivery delays that have grounded many of its planes.

The yield on AirBaltic's €380 million 2029 bond has risen sharply since March, LSEG data shows, reflecting higher perceived risk.

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Latvian Prime Minister Andris Kulbergs told journalists last week that the government could not continue to support airBaltic unless the company presented a clear strategy for its future.

"There needs to be a strategic commercial investor who also takes an active stake in the company," Kulbergs said.

The airline has yet to repay a €30 million ($34 million) short-term loan from the Latvian government due in August and failed in June to replenish a reserve account required under its 2029 senior secured notes, Fitch Ratings said last week.

It will need to make up for a free cash outflow of €156 million in 2026 to be able to continue as planned, Fitch Ratings corporate ratings director Raman Singla told Reuters.

Singla said airBaltic's capital structure, which involves leased aircraft and the "very expensive bond" due 2029, "is not sustainable in our view. So, they really would need to find some form of fix".

Fitch has placed airBaltic's long-term issuer default rating of "CCC-" on Rating Watch Negative. It said the bond carries a recovery rating of "RR4", indicating investors could recover 31% to 50% of principal in the event of a default.

The rating agency may further cut airBaltic's rating to C if bondholders agree to worse terms, Singla added.

"Once they receive the consent from bondholders, that's when we'll have to reconsider, including details from the yet to be announced 'Interim Financing'," he said.

($1 = 0.8759 euros)

(Reporting by Alessandro Parodi in Gdansk. Additional reporting by Tim Hepher in Paris, Joanna Plucinska in London and Janis Laizans in Tallin. Editing by Adam Jourdan and Mark Potter)