BNDES Wants to Sign Agreement with Two Brazilian Airlines This Week

RIO DE JANEIRO, BRAZIL – According to sources close to the government, BNDES (Brazil’s National Development Bank) expects to be ready to sign pacts with Azul and Gol by the end of this week, calling for financial operations that could result in a capitalization of up to R$2 billion (US$450 million) for each company. The development bank will be able to supply up to R$1.2 billion per company, equivalent to 60 percent of the resources.

Azul hopes to close the deal soon. However, in Gol’s case, the company has been looking for other avenues to strengthen its capital structure. On Monday, it announced an agreement with loyalty program Smiles for the advance sale of R$1.2 billion worth of airline tickets. It is therefore unclear whether or not the company will use the operation developed by the BNDES, and when.

Only after signing the terms with BNDES would the companies be in a position to structure the funds that would effectively be launched on the market – in the previously announced format, 75 percent simple debentures and 25 percent convertible bonds. Signing with the government bank is not the final step to obtain the funds; rather, it is the initial step.

The operations, as previously disclosed, should be launched on the market and will be priced by the investors themselves, based on parameters provided by the development bank. But ultimately, BNDES will adhere to what is obtained in the bookbuilding process. The government expects that the market improvement will make it unnecessary for the bank to cover the expected ceiling of operations.

Both Azul and Gol have achieved significant market value rebound – albeit still far from their highs. Azul climbed from R$5.78 billion in late March to the current R$7.35 billion, while Gol more than doubled its market capitalization, from R$3.1 billion to R$7.1 billion in the same period.

Debt securities, bonds issued outside Brazil, illustrate the perceived credit risk of companies. Azul’s bonds maturing in 2024 are traded at a 55 percent discount and Gol’s, maturing in January 2025, at 42 percent. The higher the discount, the greater the investors’ risk perception. The reason for the difference lies in Azul’s tighter cash position.

To access the maximum of R$1.2 billion from BNDES, plus R$200 million from the partner commercial banks in the operation, companies will have to find market interest for at least R$600 million. With no market, there will be no BNDES involvement.

The Brazilian government’s actions regarding the airline sector have sparked criticism, as it is taking longer than in other countries, and companies are equally affected by the coronavirus crisis worldwide. Asked about the deadlines, a source linked to the government said that BNDES should be seen as “the last resort”, because companies need to try to adjust to the current scenario.

In this regard, Azul recently announced a commercial partnership with LATAM, for code sharing flights, domestic connections and points programs. On Monday, the company also initiated an employee dismissal procedure that the labor unions estimate covers over 1,000 firings – a figure the company has not confirmed.

In addition to the operation with Smiles, which is controversial among the subsidiary’s minority shareholders, Gol is assessing other funding alternatives and is trying to resume talks that were underway in pre-Covid times. The company had already notified the market that it could seek R$1 billion through credit lines using parts and equipment as guarantees.

Last week, Azul announced the sale of its minority stake in TAP, under an agreement with the Portuguese government to capitalize the airline in €1.2 billion. Under the agreement, Azul received approximately €10 million from Atlantic Gateway, out of a total of €55 million – the remainder was paid to David Neeleman, the company’s controlling shareholder and partner in the Portuguese contract.

The Portuguese government also asked Azul to agree not to convert TAP bonds into shares until their maturity in 2026, because conversion would give Azul a 41.25 percent equity stake in the airline.