Michael Conway, chief executive officer of Air Jamaica, hopes to bring the airline to break-even on its operations by 2009. - File Keith Collister, Business Writer
Air Jamaica raised its targeted US$125 million on the international capital market on Thursday by way of a Government-guaranteed bond issue arranged by U.S. investment bank Bear Stearns.
The bond has a 20-year tenor and is scheduled to mature in 2027, but its average life is only 15 years as repayment in 21 equal, semi-annual instalments, commences in the 10th year.
The offer document disclosing the airline's current financial position and prospects mentions the sale of the London route to Virgin, saying the deal was worth US$10 million.
The bond offering had a fixed coupon of 8.125 per cent and, at an issue price of 98.949, was priced at a slight discount to face value to yield 8.25 per cent or approximately half a point above the closest comparable Government of Jamaica eurobond maturing in 2025.
A senior syndicate official at Bear Stearns advised that getting the bond issue placed was a significant success considering the much more difficult international market environment over the past week, particularly the sell off in the Chinese stock market and the very significant rise in ten year U.S. treasury yields.
At one point on Thursday, U.S. treasury bonds were trading at 5.12 per cent, an almost unprecedented fifteen basis point one-day rise in bond yields.
"The success of the transaction was due to the considerable goodwill that Jamaica has cultivated amongst the investment community, and the great care we took with this transaction, identifying people who really understand the Jamaican story," said the Bear Stearns official.
The fact that the new issue has a higher yield than the comparable GOJ eurobond appears to have made it attractive to international investors, presumably due to their confidence in the Jamaican government's guarantee to meet the debt obligation in the event that Air Jamaica cannot.
The airline is a sustained loss-maker, wracking up a deficit of more than US$1 billion in a decade, but president Mike Conway has a new plan to bring the carrier to breakeven in three years.
The proceeds of the bond offering will be used to repay existing debt including US$35 million of advances from funds received under the Petrocaribe arrangement, refinancing US$38 million in local bank loans and repaying US$38 million of outstanding trade liabilities. Another US$12 million will also be used to fund capital expenditure associated with changing the fleet of aircraft.
Air Jamaica lost US$128.4 million in 2006 on total revenues of US$393.3 million, almost the same as its net loss of US$131.5 million on total revenues of US$390.7 million in 2005.
The losses in both financial years are substantially larger than losses for 2004, the last year of private ownership.
In the April 2005 budget, the Government's then new business plan for Air Jamaica had provided for losses of US$30 million per year as part of a key element of its restructuring strategy, which allows for the injection of up to US$30 million annually for five years by way of preference shares, or an overall commitment of US$150 million.
The goal was to achieve a breakeven position on operations in 2009.
"The plan was dependent on a number of assumptions, including minimal competitive incursions, stable fuel prices and a reduction in aircraft lease costs, none of which materialised," said the offering memorandum for the bond.
"During 2005 and 2006, competition and fuel costs increased beyond our expectations and lease costs could not be renegotiated as anticipated. These factors created significant deviations from our forecast revenue and increased the overall cost of operations by over US$65 million during 2005 and 2006."
Air Jamaica has now developed a new business plan for the period 2007 to 2009 which includes rationalising the fleet by replacing it with more affordable aircraft, restructuring underperforming routes such as London, reducing expenses through staff reductions and outsourcing and developing new routes that complement Jamaica's strategic location in the Caribbean region.
The airline projects savings of US$25 million from its abandonment of the London route, which was responsible for US$27 million of losses to the airline last year and was projected to lose US$30 million this year.
The route was sold to Virgin for US$10 million.
Moody's assigned a rating of B1 to the Air J bond while S&P gave it a B rating, the same as those of the Jamaican government, based on the unconditional and irrevocable GOJ guarantee passed in the House on Tuesday.
keithcollister@cwjamaica.com
