AirBaltic bond yields soar as embattled carrier faces crunch creditor meeting

By Gianluca Lo Nostro

Sept 10 (Reuters) - Bond yields on embattled airline airBaltic's debt are sending a warning signal ahead of a crunch investor meeting this week.

Yields hit a record high on Wednesday, reflecting investor anxiety ahead of Friday's meeting that will decide the fate of emergency financing for the Latvian carrier that is backed by the state and Germany's Lufthansa.

Prices of airBaltic's €380 million 2029 bonds fell to record lows on Wednesday driving up yields as much as 176%, LSEG data showed. Bond yields rise and prices fall when investors view the debt as riskier.

The carrier, majority-owned by the Latvian government, is a test case for the wider airline market where weaker operators that struggle to pass on higher costs, face the biggest pressure from soaring jet fuel prices caused by the Iran war.

IRAN WAR SHARPENS RISKS FOR WEAKER AIRLINES

AirBaltic has faced engine shortages that have grounded part of its all-Airbus fleet and delayed plans for a stock market listing. The Iran war piled on the pressure, forcing the airline to suspend lucrative flights to Dubai and swelling its fuel bills, raising concerns about its ability to refinance or repay its debt.

Dublin-based budget airline Ryanair warned this month that short-haul air fares would have to rise if current conditions continued in 2027, and said that some rivals would struggle to survive through the winter season.

At a virtual meeting on Friday, airBaltic will ask bondholders to approve a plan to raise up to €257 million through new super-senior debt due in 2027. The proposal will require approval from more than 75% of those present and the airline lowered the quorum for bondholder meetings to over 25% after an August meeting failed due to low attendance.

The new bonds would take priority for repayment from collateral — which includes eight aircraft and seven engines — while notes due in 2029 would fall to third priority, which analysts said could be behind the Wednesday yield spike.

"Existing holders are being asked to approve something that subordinates their own claim," said Yves Schwyter, founder of aviation capital risk intelligence firm Vectus Intelligence.

The plan is backed by credit fund Polus Capital, which has committed to subscribe at least 50% of the new notes, and by Israeli investment firm Klirmark Capital.

The Latvian government, which is also a bondholder, supports efforts to stabilise the airline but has stopped short of committing additional temporary funding, public broadcaster LSM reported on Tuesday. Fitch said last month that the European Union rules on state aid and political considerations made the prospect of large equity support from the state problematic.

"Nobody, including the state, has publicly committed to a named Plan B. That absence is itself the honest answer, more than any single mechanism I could name with confidence," said Schwyter.

(Reporting by Gianluca Lo Nostro; Editing by Tomasz Janowski)