As reported in its Q1’20 financial results on May 7, IAG had a solid balance sheet and liquidity position prior to the health crisis. It had cash and undrawn credit lines amounting to 10 billion euros as of April 30. So the board’s announcement that it is considering a 2.75 billion euros capital hike to strengthen its balance sheet (61% market capitalisation) was surprising. Effectively, the group is evaluating the benefits of a rights issue for that amount which would further reinforce its financial position.
According to Renta4’s calculations, the airline’s current liquidity must have been cut to around 8.4 billion euros. This includes the 750 million GBP (827 million euros) received through the agreement announced last week to extend its commercial accord with American Express.
Renta4 experts believe there are several reasons why IAG has considered a capital hike, which would be very dilutive for shareholders:
1) Strong rate of cash consumption (about 200 million euros/week) with the planes on the ground.
2) Perception that the recovery of air traffic will be slower than initially expected.
3) Capital strengthening after the main European flag carriers have received state aid.
4) Intention of recovering the “investment grade” category
5) The need to finance the purchase of Air Europa (1 billion euros. Although we believe this price is negotiable, and with a break-up clause of 40 million euros).