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09/30/2011 / AIR TRANSPORTATION AND RAIL FINANCING

The innovative bond issue for Ryanair is a breakthrough in air transport financing

André Zervudachi, Executive Director, and Cyrille Fofana, Vice President of the Aviation Group - in Paris, explain the background and describe the steps leading up to this landmark bond issue.

The deal

In July 2011, Crédit Agricole CIB, together with Goldman Sachs, acted as structuring agent and bookrunner for a 12-year EUR 156 million bond issue on behalf of Ryanair. The proceeds of the issue enabled Ryanair to refinance a portion of the loans it used to purchase new Boeing 737-800 aircraft delivered in January 2011.

The Ryanair bond is the first issue in Euros to be guaranteed by the Export-Import Bank of the United States (i.e. Ex-Im BankEx-Im Bank (Export-Import Bank of the United States) is the US export credit agency.
Its objective is to support and promote exports of US products across the world's markets. It was created by decree in 1934 by President Roosevelt. Its specific mission consists of proposing guarantees, loans and insurance policies on exports of US goods and services.
) and floated by the Irish airline company.

Why use an export credit agency to guarantee a bond issue?

Until recently, airline companies relied a lot on debt in the form of loans guaranteed by export credit agencies to finance their purchases of aircraft. Margins on export credits skyrocketed in 2008-2009 as a result of higher refinancing costs for banks, and the liquidity crisis.

Export agencies are fully State owned and backed. However, the export credit they guaranteed wound up having a significant spread over the sovereigns bonds. Consequently, in the United States, Ex-Im Bank began preparing to finance aircraft export contracts on its own. At the same time, airline companies wondered why they were being asked to pay such high margins on US sovereign risk. Therefore, it became essential to seek new means of financing at a lower cost and a suggestion was made to tap institutional investors to finance aircraft via the market with transactions guaranteed by the export credit agencies.

"Crédit Agricole CIB studied this idea and worked in association with Goldman Sachs to launch this ground-breaking transaction. In May 2009, the two banks acted as structuring agents and bookrunners on an issue for Emirates, making Emirates the first airline company to float a dollar-denominated bond issue guaranteed by Ex-Im Bank. The issue was then placed on the US market", explains André Zervudachi. As it was highly innovative, this transaction became a case study at Harvard Business School.

Consequently, around twenty similar deals were closed for other airlines, including Ryanair (Europe's leading low-cost company), and several aircraft operating lessors.

First Ryanair bond issue in US dollars

In November 2010, Ryanair, being a Crédit Agricole CIB client for several years, floated a USD 184 million bond issue backed by Ex-Im Bank. This transaction took place as part of the financing for a series of global orders made in 2002 and amounting to more than 200 Boeing airplanes. Crédit Agricole CIB and Goldman Sachs acted as structuring agents and bookrunners for this financing project.

A milestone in airline financing: a euro-denominated issue for Ryanair

Satisfied by this new financing instrument, Ryanair sought to float an issue in Euros, the currency in which the bulk of its income is denominated. Crédit Agricole CIB and Goldman Sachs then reviewed several options.

"The Ex-Im Bank is able to guarantee Euro-denominated bonds, with one additional feature - a variable rate, rather than a fixed rate. With the product defined, the next step was to identify European investors interested in the variable coupon, such as pension funds. Benefiting from a full US government guarantee via Ex-Im Bank, this investment opportunity had very low risk, good remuneration and an additional security over the aircraft", points out Cyrille Fofana.

After several technical adjustments, and taking advantage of a window of opportunity, Ryanair floated its issue on July 12^th, 2011. This deal was successfully placed on both the European and US markets.

Howard Millar, Ryanair's CFO, stated: "This was tremendously successful since floating an issue in euros signifies that we are now able to associate our financing sources with our income sources, which is a very important breakthrough for us." He went on to add: "From a business perspective, it's much simpler to finance airplanes in the same currency as that used to generate a large majority of our profits."

This inaugural issue paves the way for a new form of financing that is of interest not only to airline companies but also to entities working in rail financing.

"For Crédit Agricole CIB, the success of this landmark operation shows once again the capacity of its Aviation Group and Rail Finance teams as well as its Capital Markets Division in New York and Paris to innovate. Moreover, it is the result of the excellent teamwork of the various groups involved in product development in New York and Paris, syndication in London and New York and sales in Europe's capitals. Since 2009, Crédit Agricole CIB and Goldman Sachs have arranged nearly 60%, in value terms, of all bond issues backed by export credit agencies on behalf of airlines and aircraft operating lessors", concludes André Zervudachi.

Crédit Agricole CIB: one of the world's leaders in air transportation and rail financing