We provided our view on discount carrier Norwegian back in April 2018
following the announcement that British Airways parent IAG had acquired a minority stake in the firm to facilitate takeover talks. At that time, our main points concerned the fact that we could not see the synergies; IAG's gambit seemed both too risky and too early given that Norwegian’s business was already deteriorating and showing stress from an overleveraged balance sheet.
The latter point is still the key issue for Norwegian.
As the chart below shows, the company's one-year default probability has risen to a record high. Based on Norwegian’s current numbers, its current credit rating is just one notch above distressed. The issue for Norwegian is that once you enter this territory, the dynamics become self-reinforcing. The special rights issue announced on January 29
is expected to raise NOK 3 billion, and while this amount appears large when viewed against the firm's current market value of NOK 4.1bn, it is far smaller when seen in light of Norwegian's massive debt obligations of NOK 92.6bn (where long-term operating lease obligations are NOK 58.7bn).
The current crisis for Norwegian is coming at the worst possible time. The global economy is growing below trend, and is still slowing down. Such an environment will reliably see demand soften for airliners while investor risk-aversion rises dramatically.
This will make it far more difficult for Norwegian to get the funding necessary to weather the storm.