Billionaire’s Airport Bonds Sunk by Argentina Hangar Grab
Borrowing costs at billionaire Eduardo Eurnekian’s airport in Buenos Aires are surging by the most in eight months versus Argentine corporate issuers as the nation’s move to seize one of its hangars deepens concern the government wants to extend its control over the industry.
Aeropuertos Argentina 2000 SA’s bonds due 2020 have tumbled 2.75 cents to 93.19 cents on the dollar since Aug. 21, when regulators told Latam Airlines Group SA (LFL) it had 10 days to abandon a hangar at the Aeroparque Jorge Newbery airport. The selloff caused yields to surge 0.93 percentage point to 12.99 percent, almost twice the increase for Argentine corporate borrowers, according to JPMorgan Chase & Co. Yields in emerging markets rose an average 0.16 percentage point in the same span.
While the order to abandon the hangar has been stayed in courts, government pressure on Latam adds to concern President Cristina Fernandez de Kirchner wants to remove the Santiago-based carrier from Argentina’s second-biggest airport to bolster state-run Aerolineas Argentinas SA, BCP Securities LLC said. Since 2007, Fernandez has nationalized pensions, railways and an airline, as well as oil producer YPF SA.
“There had been speculation the government, either directly or through Aerolineas Argentinas, wants to take over Jorge Newbery and only allow Aerolineas to operate through that airport,” Jim Harper, head of research at BCP, said in a telephone interview from Greenwich, Connecticut. “Whenever the government strong-arms a privately owned company, it sends shivers down investors’ spines.”
BCP maintains an outperform recommendation on Aeropuertos Argentina 2000, known as AA2000, because payments are secured with dollar revenue and it would be neutral to the company’s results if Lan ceased operations at Aeroparque, Harper said.
The 10.75 percent bonds have returned 16.9 percent this year, according to data compiled by Bloomberg.
The company covers annual debt service of about $42 million for a total outstanding of $276 million of the 2020 notes with approximately $127 million in operating fees and duty-free receivables it deposits in an offshore trust each year, according to a June 28 BCP report.
“AA2000 has a contract to operate 33 airports in Argentina, including Aeroparque,” Matias Patanian, chief executive officer, said in an e-mailed response to questions. “Therefore, no individual airport concession can be revoked.”
Even if Lan left Aeroparque, AA2000 would make up for that revenue with other airlines, Patanian said. The company is constructing a new wing of the airport for increased flight activity and retail space, he said.
Eurnekian’s Corporacion America SA and Corporacion America Sudamericana SA own 75.7 percent of AA2000, according to the company’s website. In late 2011, the Argentine government exercised a call option from March 2008, converting $36.8 million in bonds into a 15 percent stake in AA2000, according to Standard & Poor’s.
AA2000 operates 33 of the country’s 54 airports. Aeroparque was responsible for 12 percent of total revenue in 2012, the second-biggest source of revenue after Argentina’s main international airport Ezeiza.
Eurnekian told reporters at an Aug. 22 event the government had been “sloppy” with the eviction notice because it should have given Lan more time and negotiated “rationally.”
Latam’s vice president of strategic planning Roberto Alvo said in a conference call Aug. 21 the measure is in line with increasing level of actions against its Argentine unit by the government. Mariano Recalde, head of Aerolineas Argentinas, said the order is part of a “fairer distribution system” that gives priority to the national airline.
A week later, Argentine Deputy Economy Minister Axel Kicillof said in a press conference the country wants the airline to stay and that he didn’t understand the outrage over a “little hangar.” The eviction notice is on hold pending Lan’s appeal.
Bonds fell on concern the measure could lead to greater government control of the industry, which often results in loss of profitability, even if it’s not an immediate threat to bond payments, according to Richard Segal, head of international credit strategy at Jefferies Group LLC. in London.
“The Argentine government has a reputation of taking measures that in general fixed-income investors dislike, with the implication that when there’s a headline like this they say, ‘this must be bad for us’ and sell,” Segal said in a telephone interview from London.
Fernandez nationalized Aerolineas Argentinas in 2008 from Spain’s Grupo Marsans after congress declared the airline a “public good subject to expropriation.” Last year Fernandez seized YPF, the country’s biggest energy company, from Madrid-based Repsol SA. (REP) In 2009 she nationalized the country’s $24 billion pension fund industry.
Her husband and predecessor, Nestor Kirchner, nationalized the country’s largest water utility, Aguas Argentinas SA, in 2006, and the national postal service in 2003, citing a failure to fulfill investment plans.
The government’s economic policies contribute to investors demanding 10.55 percentage points of additional yield over U.S. Treasuries to own Argentine debt, the highest in emerging markets. The gap narrowed 32 basis points at 2:26 p.m. in Buenos Aires. The peso was little changed at 5.7022 per dollar.
AA2000 sales increased 20 percent to 2.3 billion pesos ($403,300) in 2012 from a year earlier, while net income fell 49 percent to 989.6 million, according to company filings to regulators.
Standard & Poor’s in June affirmed its B- rating on the company, six levels below investment grade and the same as the Argentine government, stating the company should be able to maintain credit quality assuming tariff adjustments of 15 percent approved by the regulator in November 2012.
Bonds may continue to underperform as the government’s pressure outweighs financial results, Segal said.
“There’s always a panic and sell rather than look at the numbers in detail,” he said. “There’s the perception this government is capable of doing anything and picking a fight with anyone.”