Air France-KLM: Come fly with SLBs

11 minute read

Air France-KLM is in the market with its inaugural sustainable debt. Initial press reports have been critical that this is being used to repay state aid. Using our option pricing model, we estimate the value for the five-year bond SLB premium to be 7.5bp.

While significant for an investment-grade issuer, this has a more muted impact on the funding spreads for Air France-KLM. Nevertheless, it also is a positive step to make a public climate commitment which will increase transparency in a challenging sector.

Examining the public information on this deal, we highlight the following positive elements of the SLB proposal.

Firstly, by issuing SLBs, Air France-KLM is shifting from post-pandemic government support to debt products that both increase transparency and their commitment to reducing emissions. The Key Performance Indicators (KPIs) included in the SLB are intensity measures and baselined to 2019, i.e., before the pandemic when volumes were high; setting the reduction from 2019 is therefore more ambitious, and the probability of pay-outs in the SLB structure commensurately higher. We estimate it at around 50%.

Download pdf (0.2mb)