Equities & Fixed Income

I119443 Patricia Clare Summerfield Equities & Fixed Income Investments

Part 1 (50 marks)

You work in the Origination team of a global investment bank. You have been in regular contact with the finance team at British Airways plc, which your bank hopes to win as a client. You know that BRITISH AIRWAYS is planning the acquisition of four new Airbus A380 aircraft with a list price of $390 million each. You wish to win a mandate from BRITISH AIRWAYS for one or more bond issues to finance the purchase of these aircraft.

Your task is to consult the BRITISH AIRWAYS annual report and accounts, available on Yahoo Finance or other public sources, and write a report analysing the advantages and disadvantages of three types of financing:

a) A syndicated loan

b) A bond issue

c) A medium term note programme

You should include the following topics in the report:

1. The overall cost of financing

2. The repayment structures

3. Which type of financing would involve the most favourable terms and conditions for BRITISH AIRWAYS (excluding the cost factor?)

4. The investors/lenders that would be used for each type of financing

5. Any other factors that BRITISH AIRWAYS should consider.

BRITISH AIRWAYS: Fund requirement $1,560,000,000 for the acquisition of Airbus Aircraft.  This report analyses the advantages and disadvantages of the following types of financing:

a) A syndicated loan

b) A bond issue

c) A medium term note programme

Prepared by Clare Summerfield

In this report we discuss the pros and cons of different types of financing; syndicated loans, bond issues including embedded options, other flexible structures and shorter term note structures.  We are not considering a new issue of additional BRITISH AIRWAYS equity.  

The decision regarding the mix of debt and equity securities to finance assets, (the leverage decision) is an important financial decision.  (Ogden Joseph, 2002).  Increasing the company level of debt may impact the company’s credit rating, currently at Ba3 Moody’s and BB Standard & Poor’s.  There also may be negative implications on equity and bond pricing.   The expected return on a firm’s assets depends entirely on the nature of the firm’s assets (specifically the riskiness of the assets). (Ogden Joseph, 2002)

BRITISH AIRWAYS IAG current capital structure;

A Syndicated Loan

There are a number of reasons a syndicated loan is worth considering to fund the upcoming acquisition.  A syndicated loan can be arranged backed by a number of commercial and investment banks that make up the syndicate.  This is a common method of financing when the finance requirement is significant, ensuring that no one bank is solely exposed to the full credit risk.  

The members of the syndicate will be divided into lead arrangers who will liaise directly with BRITISH AIRWAYS and other syndicate members known as participant lenders.  The funds will be raised by each group and the terms of the loan will be negotiated between lenders by the lead arranger however any change to the terms relating to the principal or repayment or collateral will require a unanimous agreement by all members of the syndicate.

There are many benefits to acquiring credit via a Syndicated loan.  The lead arrangers who will collect and monitor information will communicate directly with British Airways.  Coordinating a capital loan in this way reduces the need for dealing with multiply lenders who will each need to understand the business and financial structure, at the same time building up a track record with strong partners for future borrowing needs.