Delta Cash Is Making Bondholders Believers in Money-Losing Gol

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Brazil’s biggest airline has found its ticket out of bond-market distress.

Gol Linhas Aereas Inteligentes SA’s $325 million of notes due 2022 have posted a record surge since the company’s controlling holder and Delta Air Lines Inc. said Friday they will boost investment in the money-losing carrier. The announcement has pushed the bonds’ yield premium over U.S. Treasuries below 10 percentage points -- the threshold for debt considered distressed -- for the first time since February.

The investments will increase Gol’s cash hoard by an estimated 60 percent after the worst Brazilian recession in a quarter century led the airline to post its fourth straight quarter of losses in May. The 15 percent plunge in Brazil’s currency this year has also battered Gol by swelling the cost of its debt, which is denominated mostly in dollars.

“We’ve been watching Brazilian gross domestic product for a while, and the trend has been bad, constantly,” George Ferguson, an airline analyst at Bloomberg Intelligence, said by telephone from New York. “It’s nice to know you’ve got Delta willing to put money in the company. As an investor, it gives you some comfort.”

Gol said Friday that Delta will raise its equity stake in the Sao Paulo-based airline with a stock purchase of as much as $56 million, while shareholder Fundo de Investimento em Participacoes Volluto will invest as much as $90 million. Delta, based in Atlanta, will also guarantee a term loan with third-party lenders for as much as $300 million.

Economic Outlook

Banco BTG Pactual SA estimates the transactions will increase Gol’s cash, which totaled 2.4 billion reais ($764 million) at the end of the first quarter, by 1.5 billion reais.

Gol Chief Financial Officer Edmar Lopes said on a conference call Friday that it’s important to strengthen liquidity at a time when Brazil’s GDP is contracting.

The airline gets about 89 percent of its revenue from Latin America’s largest economy, which is expected to shrink 1.4 percent this year, according to estimates compiled by Bloomberg.

On Monday, Gol’s bonds jumped the most since they were sold in September 2014 and have gained 5.2 percent since Friday. At 12.4 percent, the notes now yield 9.6 percentage points more than Treasuries.

The real was little changed at 3.1401 per dollar Wednesday as of 2:10 p.m in New York.

‘Credit Positive’

The cash infusion “provides liquidity and credit relief to Gol,” David Tawil, who manages $80 million as co-founder of hedge fund Maglan Capital in New York, said in an e-mail. “The market will see that as evidence that a respected and well-capitalized industry player is supporting a questionable player.”

Delta, the third-biggest U.S. airline, is rated Ba2, four levels higher than Gol’s B3 junk-grade by Moody’s Investors Service. The ratings company said Tuesday the cash infusion is “credit positive.”

Gol posted a net loss of 704.6 million reais for the first quarter and said gross debt to earnings rose to 7.3 times, the highest since 2013.

“The equity infusion means lower leverage,” which means the bond spreads should be tighter, Jorge Piedrahita, the chief executive officer of New York-based brokerage Torino Capital LLC, said in an e-mail.

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