World’s Worst Airline Bonds Are in Latin America as Dollar Climbs

Bloomberg — The dollar’s relentless climb is bringing pain for holders of Latin American airline bonds.

Notes from the region’s carriers led to losses in the sector over the past month as currencies from the Brazilian real to the Colombian peso got hammered, making it more expensive for locals to travel abroad and increasing the costs for airlines to service their debt. The weakness was enough to offset a modest drop in oil prices, which are still up almost 35% in the past year, and a surge in demand that has airports across the globe packed.

Brazilian carriers Gol Linhas Aereas Inteligentes SA (GOLL4) and Azul SA (AZUL4) were the biggest losers, with dollar-denominated securities plunging as much as 25% in the past month. They were also the worst performers among the nation’s corporate dollar debt. The real fell 3.5% against the dollar, edging closer to erasing year-to-date gains that were once the largest in the world as emerging-market currencies come under pressure amid forecasts of a global recession ahead.

“Sentiment is horrible,” said Ray Zucaro, chief investment officer at RVX Asset Management. “Currency weakness, dollar debt, higher fuel costs and economic slowdown are a recipe for turbulent flying ahead.”

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Elsewhere in the region, Grupo Aeromexico SAB (AEROMEX) and Avianca Group International Ltd. (PFAVH) also underperformed most global peers. Dollar bonds from the Mexican carrier due 2027 fell 4.9% while the Colombian airline’s notes due 2028 were down 3.7%, worse than the 0.7% drop in global airlines debt, according to data compiled by Bloomberg.

Airlines racked up huge losses during the pandemic, as they were forced to ground fleets due to government shutdowns and a plunge in demand. Three of the region’s largest carriers, including Avianca, filed for Chapter 11 bankruptcy. In May, Avianca and Gol said they would unite under a common ownership structure called Abra Group Ltd.

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As mobility restrictions eased, the world saw torrid demand for air travel and carrier bonds rebounded. Gol and Azul’s dollar debt almost erased the pandemic shock and held steady for most of 2021 until tumbling again in recent months as growth concerns mounted and Latin American currencies slumped.

Gol’s dollar bonds due 2025 handed investors a 24% loss over the past 30 days, sending the yield to maturity 36%, deep in distressed territory. The firm’s perpetual debt lost almost 25% to trade around 50 cents on the dollar. Azul’s bonds due 2024 and 2026 dipped more than 10%, pushing the yield on the longer dated notes to 21%.

Shares of both companies are also falling -- Morgan Stanley cut its price targets for the stocks by almost half earlier this month, expecting worsening earnings and “a major deterioration of the cash flow scenario” as airlines won’t be able to pass on higher costs to consumer at the same pace going forward.

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The weaker real is sapping international travelers’ spending power and also increasing costs for airlines that are priced in dollars. At the same time, higher interest rates in Brazil are weighing on consumer sentiment.

“Passing through these cost increases to the end consumer is more complicated and typically takes time.” said Rafael Elias, the managing director of Latin American corporate credit strategy at Banctrust & Co. in New York. “Many, if not most, travelers usually pay with their credit cards, and if you carry a balance, the rates these cards charge can be prohibitive.”