Irish carrier Ryanair returned to the bond market on 8 February, issuing a 6.5-year eurobond, raising €750 million ($803 million).

The deal priced at 1.125% and listed on the Irish Stock Exchange.

The joint bookrunners were BNP Paribas, Citigroup and Crédit Agricole. Freshfields and A&L Goodbody acted as legal counsel for Ryanair. Clifford Chance acted for the banks.

The orderbook for the transaction was just over €3 billion, according to Neil Sorahan, chief financial officer of Ryanair.

Upsized offering

Sorahan says he was happy with the upsized €750 million figure, even though the carrier could have increased the offering more on the back of strong demand. “That was a number that we originally went out with, a benchmark deal which is effectively €500 million,” he tells Airfinance Journal in an interview. “We decided to upsize that to 750 on the day. We could have taken more, but we were very comfortable with €750 million.” 

The last time the carrier tapped the unsecured bond markets was back in March 2015, when it raised €850 million to be repaid over eight years. That bond also priced at 1.125% at mid-swaps plus 67 basis points - setting a new record for the aviation industry. The Irish airline has now tapped the European capital markets three times, raising a total of €2.45 billion.

Despite choosing to go back into the capital markets to source financing, Sorahan says that the carrier is constantly assessing the cheapest forms of financing, whether its unsecured bonds, Japanese operating leases with call options, cash or sale and leasebacks.

During the past 12 months, the carrier has financed the majority of its aircraft using its own cashflow.

For the year end 31 March 2017, Ryanair will take 52 new Boeing 737-800 aircraft, all on its balance sheet.  In the next financial year up to 31 March 2018, the carrier has 50 737-800 deliveries. “Those will be financed by a combination of the proceeds from our bond yesterday, cash resources and we continue to look for all cheap and competitive sources of financing in the market,” says Sorahan.

Despite of headwinds of Brexit and a weak pound sterling, Sorahan says that he expects “a strong appetite” for this week’s bond. “Our existing bonds have been trading well in the secondary market since they were issued in 2013 and 2014. Both of those issuances were well oversubscribed, and we had an expectation that we'd have a lot of interest in our current bond.”

Ryanair is “very highly rated” with BBB+ stable ratings from both S&P and Fitch, he adds. “We were actually given an anchor rating of A, however due to the sector we are in, we were notched down to BBB+, which means that investors realise that they are getting an A rated entity at that BBB+ pricing, which is why they tend to be very interested in buying Ryanair paper.”

The proceeds from the bond will be used for general corporate purposes, to run the business, whether that is through capital expenditure for aircraft or other initiatives, such as maintenance or fuel reserves. But Sorahan says that a lot of the capital raised will “find its way into aircraft financing”.

Although acquiring new aircraft is usually a dollar expense, Ryanair puts all of its aircraft onto its balance sheet in euros. “We hedge our capital expenditure a good distance in advance,” says Sorahan. “For example, we have all of the Boeing 737-800 order that we did back in 2013, that was hedged at an average rate of 1.31 on the euro/dollar. So we're well hedged on the dollar side.”

Buying back shares

The carrier has been aggressively buying back shares over the last year, having already bought back €886m in shares and being in the process of buying back a further €550m, an initiative it announced in November 2016. Sorahan says that Ryanair is “over 90%” through the current buyback programme, and expects to complete it at the end of this month.

“Our plans are to continue to be very cash-generative within the business, with our free cashflow of approximately €1 billion per annum, which, if we decide to do future distributions and we have no firm plans as to whether we will or not, then we'll use our own proceeds generated in the business for buybacks.” 

He adds that Ryanair has no plans right now to buy any more shares back and the focus is on finishing the current buyback programme. “Our board has been clear that the business needs stay profitable, and that we're covering our capital and operating expenditure on an ongoing basis,” he says. “Then we'll look at any surplus proceeds and decide whether we will or will not return those to shareholders, but no decisions have been made beyond the current €550 million programme, which is nearly finished.”

Although he cannot be drawn to whether the airline will buy more shares back, Sorahan hints that if you look at Ryanair’s history, since 2008, the airline has returned almost €4.8 billion to our shareholders through a combination of buybacks and special dividends.

The role of the ECB

In the first nine months of this financial year - up to December 2016, the carrier’s profit after tax increased by 6% and its earnings per share increased by 14%. Sorahan says that the share buyback is part of the reason for these increases.

“The European Central Bank (ECB) are very interested in buying highly rated corporate bonds as well as sovereign bonds and we would qualify for their buyback programme. I've heard anecdotally that they've been active in the secondary market in our bonds but I wouldn't comment on who individual participants were in our orderbook yesterday." 

Airlines like Virgin Atlantic and EasyJet, which have issued bonds in sterling, are less likely to have their bonds bought back by the ECB than a carrier that is issuing in euro.

The airline now has a fleet of 365 737-800s. 9% of the fleet - or just over 30 aircraft – are leased, says Sorahan.

Although the carrier has been financing a lot of its recent deliveries through the bond markets and cash, Sorahan says he is not averse to using the sale and leaseback market to fund Ryanair’s fleet.

“There are some very attractively-priced sale and leaseback deals in the market,” he says. “We haven't been in that market for some period of time. It's something if the pricing made sense, we would look at, but that said, the unsecured nature of the bond market is at very attractive pricing at the moment.”