Gol SA’s borrowing costs are surging to a three-year high, pushing its debt to distressed levels as investors lose confidence in the airline’s ability to contain expenses and preserve its market share.

Yields on Gol’s bonds, which never have to be redeemed, rose 1.93 percentage points the past month and touched a high of 15.95 percent. In the same span, borrowing costs for Latin American companies that share the debt’s’ B rating declined. Bondholders now demand more than 10 percentage points in interest above U.S. Treasuries to hold Gol’s notes.

The airline is cutting flights, firing workers and seeking to renegotiate covenants on local debt after losses in five of the past six quarters. Gol, which relies on domestic routes more than bigger rival Tam SA, faces higher fuel expenses after the real’s 10 percent drop this year.

“There’s nothing positive to say at this point,” Roger King, an analyst at New York-based CreditSights Inc., said in a telephone interview. “The currency is pretty weak. They have a waived covenant default. TAM is competitively stronger and they’re losing market share to the junior guys.”

Fuel costs

“Gol is working to recover profitably even facing a unfavorable macroeconomic scenario,” press official Marcus Pinto, said in an e-mail. There’s “no pressure on the short term.”

The carrier has no bonds or loans maturing next year and $57 million due to be paid in 2014, according to data compiled by Bloomberg.

Gol reported a third-quarter adjusted net loss of 309 million reais ($150 million) on Nov. 13, wider than the 230 million reais that analysts projected, according to data compiled by Bloomberg.

Fuel costs added 119 million reais to its expenses in the period, after jet fuel prices climbed 20 percent from a year earlier.

The company is trying to protect itself from currency volatility by boosting profit margins and adding U.S. flights to increase dollar revenue, Chief Financial Officer Edmar Prado Lopes Neto said in an interview Dec. 17.

The extra yield investors demand to own Gol perpetual bonds over 30-year Treasuries increased 1.77 percentage points in the past month to 11.14 percentage points.


In the same period, the so-called spread over Treasuries for B-rated Latin American debt fell 1.15 percentage points to 8.02 percentage points.

“Spreads at these levels show that a company has liquidity constraints,” Omar Zeolla, a fixed-income analyst at Oppenheimer & Co. in New York, said in a telephone interview.

The airline is seeking to renegotiate binding agreements on 1.1 billion reais in local debt held by Banco Bradesco SA and Banco do Brasil SA that limit the amount of debt it can have relative to earnings.

The terms on the 2015 debentures must be reworked by the end of the year or the carrier will be out of compliance and would have to pay the debt immediately, according to Prado.

Gol has 1.7 billion reais in cash and reported a deficit of 141 million reais from its operations after deducting capital expenses, data compiled by Bloomberg show.

“Failure to obtain a waiver would result in an acceleration of debt, which Gol would struggle to repay given its liquidity position,” Paul Marty, a credit analyst at Spread Research Ltd. in Lyon, France, said in an e-mail.

Mileage program

Competition in Brazil’s air-travel market is increasing after demand doubled in the past decade.

Azul Linhas Aereas Brasileiras SA, started by JetBlue Airways Corp. founder David Neeleman in 2008, bought Trip Linhas Aereas in May, making the combination Brazil’s third-biggest airline by market share. In July, Chile’s Lan Airlines completed the acquisition of TAM, creating Latam Airlines, the world’s biggest carrier by market value.

Gol’s share of Brazil’s air travel market fell 3 percentage points to 33.9 percent in the 12 months through October. That compares with gains of 1.5 percentage points for TAM and half that much for Trip Linhas Aereas, according to government data.

Paul Kakinoff, the former head of automaker Audi AG in Brazil, became Gol’s chief executive officer in July, taking over from founder Constantinto de Oliveira Jr. The airline announced last month it will eliminate 850 jobs and return 20 Boeing 737 jets as it shuts down Webjet, which it bought in 2011 for 96 million reais.

Default swaps

The company plans to take its Smiles mileage-program unit public in the second half of 2013, a person familiar with the transaction told Bloomberg News Aug. 15. The move could help stem the fall in the bond market, according to Jansen Moura, a fixed-income analyst at BCP Securities LLC in Rio de Janeiro.

“I see management doing everything they can and everything that’s necessary,” he said in a telephone interview. “In the near future, the big positive trigger would be the spinoff of the mileage program.”

The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries rose four basis points, or 0.04 percentage point, to 139 basis points yesterday in New York, according to JPMorgan Chase & Co.

The cost of protecting Brazilian bonds against default for five years added three basis points to 103 basis points. Credit- default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

The real gained 0.1 percent to 2.0693 per dollar. Yields on interest-rate futures contracts due in January 2014 rose six basis points to 7.14 percent.

Gol plans to cut domestic capacity by as much as 4.5 percent this year to increase its profitability. In the past 12 months, Gol lost 6.35 cents in operating income for every dollar of revenue, data compiled by Bloomberg show. Latam has made 5.04 cents in operating income per dollar of sales.

“They’re going through a very difficult, competitive, economic time,” CreditSight’s King said. “They grew too fast, they have to pull back and consolidate.”

Editors: Brendan Walsh and Robert Jameson. 

To contact the reporter on this story: Veronica Navarro Espinosa in New York at vespinosa@bloomberg.net. To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net; Michael Tsang at mtsang1@bloomberg.net.

Tags: gol, loyalty
Photo Credit: GOL Airlines at Brasilia (BSB) Airport in Brazil. Leandro Ciuffo / Flickr.com