By Geoffrey Smith
Investing.com -- Shares in Air France KLM (EPA:AIRF) fell over 10% in Paris on Wednesday after the European flag carrier said it will issue 300 million euros (€1=$1.0413) of convertible bonds to repay pandemic-era rescue funds to the French government.
The bonds are almost certain to convert into equity in two years' time, as they give conversion rights to both the issuer and to investors. That will result in a 6.8% dilution of the current equity base, according to the company's calculations, which are based on a reference share price of €1.4035 and a conversion premium of 22.5%.
Until the first date for exercising the conversion rights in November 2025, the bonds will pay interest at between 5.75% and 6.50%. The coupon steps up sharply thereafter, to 13% above the three-year mid-swaps rate for euros, giving the company a powerful incentive to convert them into stock.
Shipping and logistics group CMA CGM, its largest private-sector shareholder, intends to subscribe to the issue, ensuring that its stake will stay at 9.0% even if all the conversion rights are exercised. However, Air France-KLM said it wasn't aware of the intentions of any other major shareholders.
The company will use the funds to refinance the perpetual bonds issued by the French state in April 2021 to help the carrier through the temporary collapse in air travel during the Covid-19 pandemic. Air travel has rebounded strongly this year as most of the world has relaxed public health measures designed to contain the virus. Even China, the last major holdout, said earlier this week it will cut - but not abolish - quarantine requirements for arriving passengers and end a system that penalized airlines for bringing infected passengers into the country.
The Chinese measures are widely expected to trigger a gradual increase in flight movements into and out of China, which will benefit long-haul carriers like Air France-KLM.