Airbus Fraud Scandal: How Far Will It Go?

France and Germany halt Airbus export credit due to United Kingdom probe

On April 8, 2016, Germany and France ceased their export credit facilities for Airbus Group (OTCMKTS:EADSY) against its jet deliveries. The step was taken a week after United Kingdom (UK) frozen the same facility, following potential corruption probe against the company. The probe is undergoing UK’s Serious Fraud Office (SFO).

UK credit facility halt story

Four days earlier the decision, a news broke out stating that the UK regulatory authorities had temporarily frozen all credit facilities pertaining to Airbus planes. Prior to this decision, the UK Export Finance (UKEF), which is a governmental body and responsible for providing export financing for the company, stated that it has forwarded the case to SFO.

On April 1, 2016, the aircraft manufacturer already announced that it foresees lack of UK export financing for some time. Yet the company believed that this block might resume in the near future.

It is pertinent to note that Airbus Group itself announced to have found irregularities in its overseas agents’ declarations, and thus it notified the UK regulators accordingly. In this regard, the aircraft manufacturer provided details of its historical overseas intermediaries to the authority. The company’s decision to report itself reflects aerospace industry efforts to toughen compliance. Many companies are rechecking their historical records in order to avoid any surprise scandal.

The financial organization that is involved in aircraft exports underwriting business in the UK stated that it might not able to support Airbus deliveries until it receives affirmations from concerned authorities. These affirmations are linked to the company’s current practices on hiring and doing business with overseas agents.

The case under the SFO involved discrepancies in the documents submitted for export refinancing support purpose that include unsupportive overseas agents’ fees, or missing third parties’ identity on the back dates. Additionally, the representative responsible in handling such matters in export credit applications is no more a part of the company.

Airbus Credit Facility Utilization

Earlier the case, Airbus was in practice to use such financial support to accommodate in planes’ production. The factories for such are located in Germany, France, and UK.

However, the company might enter into jittery, as the three governments halt their credit lending facility. The German ministry of economy has confirmed this halt. Airbus used to receive such facility by Allianz SE (ADR) (OTCMKTS:AZSEY) on behalf of the German government. On the other hand, the French government also stated export guarantees withheld for time being. According to French officials, they are waiting for the outcome of the UK government’s audit, which is recently carried out.

Last year, Airbus had opted for export financing through these governments for 6% of its deliveries. For this year, it assumed the same amount to utilize. However, this halt raises concerns towards the aircraft manufacturer’s future performance. The aircraft manufacturer was at the verge of increasing its production facilities in order to decrease its backlog and attain more market share. Apparently, Airbus now either has to put its production on delay, or go for commercial loans from international bodies. This will further create pressure on the company to bridge financing.

Airbus Currency Hedge Policy

More than half of Airbus Group’s sales revenue is generated in US dollars. Roughly 50% of such money exposure is naturally hedged by the US dollar-denominated expenses. The remaining expenses are covered in euro, and to a lesser degree, in pounds sterling.

The company’s main intention is to generate earnings from its operations rather than foreign currency exchange speculation. Thus the company practices hedging practice to minimize the currency fluctuation impact on its EBIT.

Airbus Group manages a long-term hedge portfolio with several years of maturity, covering its net exposure to dollar sales, mainly from Airbus aircraft activities as compared to Airbus Helicopters, and Airbus Defense and Space segments. This hedge portfolio covers almost every Group’s hedging transactions.

Airbus Debt Profile

As of June 30, 2015, Airbus Group’s debt profile mainly comprises of bonds (53%), followed by European Investment Banks’ loan (19%), and repo & joint-venture liabilities (11%).

The Airbus Group has €5 billion Euro Medium Term Note (EMTN) facility available for consumption up to 30 years period. From this, the company has so far drawn a total of €3 billion. Out of which, the first maturity of €1 billion is due on August 12, 2016.

The group has also issued convertible bonds worth €500 million. These bonds have maturity date is due July 01, 2022. The company is going to pay 62.5% premium over these bonds.

At US Bonds front, the company drew $1 billion against 98 basis points (BPS) benchmark over US treasury. Its due date is April 17, 2023.