Air France-KLM Announces EUR 4 Billion Capital Restructuring to Partially Restore the Balance Sheet

No-moat Air France-KLM announced an initial capital restructuring program totaling EUR 4 billion, consisting of an equity raise and conversion of state-backed debt into perpetual hybrid bonds. The group aims to raise EUR 1 billion of fresh equity (current market cap of EUR 2.2 billion), while EUR 3 billion of the EUR 7 billion French-backed loan will be converted to Super-Subordinated notes with a non-call period ranging between 4-6 years. Once successfully concluded, the group should see its negative equity balance of EUR 5.4 billion be reduced by EUR 4 billion and extend its debt redemption profile. The restructuring and cash inflow from the equity raise will benefit only the Air France operations of the group. The group will still operate with a negative equity balance, and a second capital restructuring program will be required to fully restore the balance sheet, which will be addressed at the group’s 2022 AGM. We previously estimated that the group will require a capital restructuring to the tune of EUR 4 billion and believe these measures go a long way to restore the balance sheet. We make no changes to our fair value estimate of EUR 6.10 per share and maintain our extreme uncertainty rating.