Air France-KLM Tees Up for a Capital Raise; We Lower Our FVE; Extreme Uncertainty Remains

No-moat Air France-KLM announced that it requires up to EUR 4 billion to restore its balance sheet and free itself from state bail out restrictions. We lower our fair value estimate to EUR 5.20, from EUR 6.40, as we incorporate the dilutive effect of a capital restructuring into our forecasts. The group received EUR 10.4 billion in state aid as a result of the heavy blow the pandemic dealt to the group’s balance sheet. The EUR 4 billion restructuring concluded in April last year was not enough to shore up the group’s finances. The balance sheet suffers from gross debt of EUR 16.2 billion and a negative equity balance of EUR 3.8 billion. The form and timing of the EUR 4 billion anticipated capital raise has not been announced, but it could be in the shape of a rights issue or debt to equity conversion--either way it will have a dilutive effect for existing shareholders given the market value is only EUR 2.8 billion. Shares are trading down nearly 8% intraday. We reiterate our extreme uncertainty rating and the potential for shareholder value destruction as a result of the high debt levels.