Lufthansa will buy back €300m of its convertible bonds issued in November 2020, maturing in November 2025, with a coupon of 2% and a conversion price of €10.4 at the current price.
This buyback is financed by the issuance of a new convertible bond maturing in 2032, for a total of €600m, carrying a coupon of 0% - sic - and a conversion price of €10.7, representing a premium of 43% on the current price.
Who, in 2025, is still willing to finance an airline at 0%? The question deserves to be asked. Probably a German bank, as the old joke popular in trading rooms would have it.
Sarcasm aside, this is a magnificent investment by Lufthansa. The German airline, which has set out to consolidate a European sector that is far too fragmented, saw its revenue exceed its pre-pandemic level last year, while at the same time resuming the distribution of a dividend that is well covered by free cash flow.
The sharp decline in fuel prices over the past few quarters should boost its margins this year, which, incidentally, got off to a good start. It is undoubtedly the combination of these favorable circumstances that has motivated investor interest in a bond issue that is so advantageous to the borrower.
Still valued below its equity value, Lufthansa has, admittedly, only posted three losses in the last two decades: one in 2009, during the subprime crisis; and the second and third during the pandemic, due to circumstances that can readily be described as exceptional.
The most optimistic investors are therefore betting on a strong likelihood of a dividend increase at the end of the financial year and, in the wake of this, a possible rise in the share price, which is currently at its lowest level in 20 years.
This enthusiasm should be tempered by the fact that, over the period, the number of shares in circulation has tripled and, apart from the pandemic, net debt is still above its historical average.
See also Lufthansa: still hasn't taken off and Lufthansa: Sum of the Parts, both published last year in these same columns.
