Turkish Airlines, whose advertisements feature sports stars including Lionel Messi and Kobe Bryant, is turning to U.S. investors to help finance plans to double the number of passengers it carries by 2020.
The company, formally known as Turk Hava Yollari AO, has hired Goldman Sachs Group Inc. and Citigroup Inc. to sell debt backed by aircraft as it looks to increase its fleet two-fold, three people familiar with the plan said Feb. 21. The amount of debt to be sold could approach $1 billion, one person said.
Airlines are broadening sources of financing amid rising global competition as Emirates and Etihad Airways PJSC use their locations in the Middle East to link Europe with Asia. Airlines sold $6.8 billion of dollar-denominated enhanced equipment trust certificates, or EETCs in 2013, compared with $3.9 billion in 2012, according to data compiled by Bloomberg Industries.
“This is good for the company because it is sharing financing risks with the market instead of leasing through borrowing from banks,” Efe Kalkandelen, an aviation analyst at Turkey’s biggest brokerage, Is Investment, said in a telephone interview yesterday. “Debt will be sold only to the investors in the U.S. This will reduce its borrowing costs.”
British Airways Plc, a unit of International Consolidated Airlines Group SA, sold in June $721.6 million of 11-year EETCs at a yield of 4.625 percent and $205.4 million of seven-year EETCs at 5.625 percent. EETCs typically are rated higher than unsecured airline debt, because such instruments give investors a claim on planes if a carrier goes bankrupt.
Asset-backed bonds have become more popular in markets beyond the U.S. with the advent of the Cape Town Convention that assures an aircraft can be repossessed in the case of default. Turkey signed up to the code in 2011.
Istanbul-based Turkish Airlines, which flies to 243 destinations in more than 100 countries, aims to double its fleet to about 450 planes by 2020.
The securities will probably be sold this year and will allow Turkish Airlines to tap EETC investors in the U.S., said two of the people familiar with the plan, who asked not to be identified as it’s confidential. Turkish Airlines spokesman Ali Genc declined to comment for this article. Chief Executive Officer Temel Kotil said Feb. 11 that the company is working on a plan to sell EETCs, without elaborating.
Capital markets, including EETCs and private placements, will provide about 22 percent of the anticipated $112 billion in financing required for aircraft purchases this year, up from 14 percent in 2013, according to Boeing Co.
Turkish Airlines has embarked on an expansion as it builds its home airport into a long-haul transfer hub linking Europe and North America with Asia, Africa and the Middle East. Gulf carriers such as Emirates employing a similar model are already capturing traffic from hubs operated by rivals.
The Turkish carrier will boost international transit traffic to 70 percent of its total by 2020 from about 40 percent today and should double its passenger tally to 100 million, according to CEO Kotil.
“They will have longer maturities, perhaps 14 years, than the conventional leasing maturities of 12 years,” Burak Isyar, an analyst at Istanbul-based Burgan Securities, said in a telephone interview yesterday.
Turkish Airlines is seeking to borrow as the lira weakened and government bond yields rose amid a corruption scandal that erupted Dec. 17 and engulfed members of the cabinet and the head of a state-owned bank. Turkey more than doubled its benchmark interest rate last month to shore up its currency.
The lira lost 0.4 percent to 2.2076 per dollar at 5:32 p.m. in Istanbul. The currency has declined 8.1 percent since the day before the graft probe became public Dec. 17, the worst performance after the Argentinian peso among 24 emerging markets tracked by Bloomberg. The yield on two-year lira notes rose 89 basis points this year, to 10.99 percent.
Turkish Airlines has 95 aircraft on order from Boeing and 117 from Airbus Group NV, with a combined list price of $22.7 billion, according to the announcements by the companies at the time of the orders last year.
“The company must sell more of such paper, because the planned sale is only about 5 percent of the list price of its purchases from Boeing and Airbus,” Kalkandelen said.