Norwegian struggling to survive makes last ditch effort to raise cash

Norwegian has always been in my analysis, the proverbial paper tiger. It’s massive expansion was fuelled by its ability to raise debt to buy and lease more aircraft, which generated cash to raise more debt to buy more aircraft. It functioned like a giant pyramid (or Ponzi) scheme.

It created a whole host of subsidiary companies and shuffled cash and aircraft about to generate wooden dollar income, all quite legal but not very sensible. The strategy behind the raise debt, buy planes, raise debt based on the income from ever increasing passenger numbers, simply couldn’t go on indefinitely, yet they acted like it could.

It’s flamboyant CEO Bjorn Kos was finally dropped and reality took hold only in 2019. First came the disaster over the 787-9 Rolls Royce engine that cost it dearly in wet leased aircraft and routes it couldn’t fly, to make the cash it depended on to service its debts. Add to that the MAX groundings and the whole efficiency and low cost strategy of opening new trans-Atlantic routes on 737-8’s fell apart.

It didn’t help that many of those routes were actually not very popular.

It’s ill fated ventures to use aircraft in low season northern winters during the high season in Argentina and Far East while novel on paper, both quickly fizzled out.

Faced with literally slamming on the financial brakes, it rapidly restructured, finally stopped spending money like a drunken sailor and raised cash through equity, but only because it was underwritten, nobody actually wanted the shares. It wouldn’t agree to an IAG offer to buy it and somehow carried on. It’s lifeline was it’s banking arm relationship and a huge back order for A320neo’s. These were so in demand it used its leasing subsidiary (which its now sold to raise more money to stay afloat), Arctic Aviation, to sell its allocated aircraft at a profit to other airlines.

Then came the Covid19 saga. The airlines in the biggest trouble are those with huge debts and no cash. If you have debts and cash, you’ll be fairly safe, as one will prop up the other to a point. Lots of debt is also something banks want back and a dead airline doesn’t pay its debts.

This is where Norwegian finds itself now. It’s basically bankrupt. It’s been hovering near that point for ages. It’s eaten the cash it raised, the MAX saga is still not over, and nor is the 787-9 engine issue, as one fix leads to another problem. It’s laid up it’s aircraft and laid off most of its nearly 8,000 staff.

But it owes a lot of people a lot of money. Part of its fund raising in the early days was bond issues. You give me money, I agree to pay it back at, say ten years with guaranteed interest of maybe 3%. For long term cash investors in a low interest world, bonds are a good, reasonably safe, deal. Those bonds now need to repaid and Norwegian doesn’t have the money.

Because Norway sees Norwegian as something of a positive brand and good for the country, a set of banks has agreed to bail out the airline, but its contingent on it persuading its bond holders to not be paid in cash. Instead they can have shares, lots of low value may never be worth more than a few cents on the dollar shares. It’s called debt for equity, a not uncommon last ditch practice. $4.3 billion is a vast amount for a company not worth half that. It also has a side effect existing shareholders hate – it devalues their shares even further.

But what choice do the bond holders or the shareholders really have? They could just raise their hands and say ‘we’re done‘ and walk away. But they almost certainly won’t. They’ll swallow hard and take the deal, hoping that somehow Norwegian will make money, their share price will eventually rise and they can sell it off at a profit, or at least not a loss.

All of this has one near certain outcome though. Low value shares are always a target for predatory buyers. Right now nobody is buying anything, but give it 18 months and an airline rebound? Norwegians shareholders will be desperate to offload for whatever they can get.