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Old 12-15-2015, 06:32 AM   #1  
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Default Virgin Atlantic borrows against LHR slots

Virgin Atlantic Uses Heathrow Slots As Bond Collateral
Dec 15, 2015 Cathy Buyck | Aviation Week & Space Technology

Secondary slot trading is a well-established practice at London Heathrow Airport. But now Virgin Atlantic has added a new dimension to these valuable airport slots: borrowing cash against them.

Virgin Atlantic is the first airline in Europe to use its Heathrow slots as collateral to raise money. The carrier owns about 4-5% of landing and takeoff rights at Heathrow and has managed to convince investors to subscribe a £220 million ($334 million) bond secured against these slots.

International Airlines Group considered a similar arrangement to mortgage British Airways slots at Heathrow a couple of years ago, but pulled out at the last minute.

Virgin Atlantic is using the bond proceeds for customer-related investments, “particularly purchase of new aircraft,” says Jo Hindle, senior manager, corporate communications at the airline. “We have a number of Boeing 787s joining our fleet in the coming years. They now will be purchased rather than leased, as we move toward a model of trying to own more of our aircraft and decrease the percentage of leased aircraft.”

The carrier took delivery of its first Boeing 787-9 in October 2014, when it became the first European airline to operate the aircraft, and now has seven in service. It will add its eighth 787 before year-end, and by the end of 2018 it expects to have at least 17 of the type. The airline also has options on a further three -9s and is expected to announce another aircraft purchase early next year.

Virgin Atlantic is financing its Boeing 787s with debt secured on its London Heathrow slots. Credit: Aleem Yousaf (Virgin Atlantic, G-VNEW Boeing 787 Dreamliner) [CC BY-SA 2.0 (<a href=], via Wikimedia Commons" />

Various airline departments, including its legal, treasury and finance teams, worked for more than a year on the slots-backed deal, to find the right structure that satisfied the needs of both lenders and Virgin Atlantic. “One of the most valuable assets an airline has is access to its slots, especially if you have a good London Heathrow slot portfolio [such as] we do. There always has been this issue that, although they are very valuable in theory, no one has every unlocked this intrinsic value before and turned it into a reality,” Hindle notes.

The airline has opted to issue the Heathrow slots-secured debt in the form of a senior note: Such notes take priority over unsecured loans, and in the event of a default will be paid back to creditors first. Maturity is 10-15 years.

As part of the deal, Virgin Atlantic set up a new subsidiary airline, Virgin Atlantic International, and the majority of its Heathrow slots will be transferred to this new entity in the event of a default of the parent company.

“This would never happen; Virgin Atlantic is in a healthy financial position and has two strong shareholders,” stresses Hindle. Virgin Group owns 51% of Virgin Atlantic and Delta Air Lines 49%. “It’s a security mechanism. Investors are looking for security when they invest a large amount of money. So in case something would ever happen and we would be unable to repay the loan, investors would get access to the slots from Virgin Atlantic International.” For now, Virgin Atlantic retains legal title to the Heathrow slots.

Virgin Atlantic International received its air operator’s certificate (AOC) from the U.K. Civil Aviation Authority Oct. 29 and commenced services on Nov. 25. It has two Airbus A330-300s on its AOC and operates several routes from London Gatwick airport to the Caribbean, including Barbados, Saint Lucia, Grenada and Tobago.

Macquarie Group arranged and facilitated the transaction, and helped find the investors. They include Pension Insurance Corp., Edmond de Rothschild Asset Management, two anonymous Standard Life Investments clients and an anonymous Hastings Funds Management client.

“This deal confirms the high value and perceived durability of slots at Heathrow,” asserts Geoffrey Weston, a partner at strategy consulting firm Bain & Company. “This increasingly high valuation of Heathrow slots is the flip side to the inability of the U.K. to increase runway capacity in the southeast. Europe’s most sizable aviation market is London, approximately double the size of the next largest city. This is highly innovative financing and it is impressive to see Virgin Atlantic pulling this off.”

The airline’s financing arrangement, using Heathrow slots as collateral, could be seen as setting a precedent, Weston says. “Will others follow? Possibly...and this is not limited to Heathrow; even Gatwick slots are increasingly traded and increasing in value.”

Slot trading is currently being practiced only at those two airports, says Peter Stanton, head of slot policy for the International Air Transport Association. But, he says, “We are likely to see the number of airports increase over time. Both the EU and the U.S. have included secondary slot trading in proposed changes to regulations.”
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