Shares of Azul (NYSE: AZUL) traded up 6% on Monday after the Brazilian government laid out the proposed terms of a state aid package for the country’s airline industry. The terms are tough, but the good news for Azul shareholders is that the company is not sure it needs the money.
Airlines around the globe have struggled due to the COVID-19 pandemic, and South American carriers have found conditions worse than most. Chile’s Latam Airlines Group and Colombia’s Avianca Holdings have both filed for bankruptcy, and Brazil’s airlines have seen traffic fall as well.
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The Brazilian government’s effort to craft an assistance plan was complicated by Latam’s filing, but over the weekend the Brazilian Development Bank finally came through with an offer of about 2 billion reais ($376 million) for Azul. The proposal includes a mix of financial instruments, including new debt and warrants, with the development bank responsible for up to 60% of the offer and banks and qualified investors coming up with the rest.
The terms are somewhat onerous, with Azul estimating that the warrants involved would dilute current holders by about 15%. But the airline said that with both its cash position and current demand trends « stronger than originally expected, » Azul’s board is still studying whether to accept the proposal or go it on its own.
Stock dilution is never ideal for current investors. The warrants would mean each share would own a smaller piece of the overall company, reducing the near-term value of the stock. But given the extent to which COVID-19 has drained the industry of revenue, a 15% dilution is a lot less of a worst-case scenario than seeing the equity wiped out in bankruptcy.
Azul looks like a survivor, and the government cash only adds to the odds the airline can steer clear of bankruptcy. That’s reason enough for the stock to push higher on Monday.
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