Etihad Airways (EY, Abu Dhabi International) is looking at all available options to avoid an impending technical default on a total of USD1.2 billion worth of bonds issued in 2015 and 2016 via a pair of Dutch limited liability private companies.

The Abu Dhabi-based carrier and several of its equity partners and subsidiaries used EA Partners I BV and EA Partners II BV to help raise funds to settle debt obligations attributed to the seven obligors. At the time, they included Etihad Airways PJSC, Air Berlin (1991) PLC, Jet Airways (India) Limited, Alitalia Societa Aerea Italiana S.p.A., Air Serbia a.d. Belgrade, Air Seychelles Limited, and Etihad Airport Services LLC. A USD700 million bond is maturing in 2020 while a USD500 million bond is due to be repaid in 2021.

However, according to sources who spoke to Reuters on condition of anonymity, the bonds are now quoted at a discount of more than 25 cents on the dollar after Alitalia entered special administration and Air Berlin filed for bankruptcy protection last year.

As a result, Etihad may have to foot the bill to the tune of USD400 million in order to keep the bond structure active.

According to the report, although Etihad is not legally obligated to finance the repayments as there is no cross-default provision in the bond documentation, it may choose to do so for political as well as reputational reasons.

With the possibility of a default in March, Etihad is reportedly holding internal talks to assess if and how to support the bonds, the sources said.

Coupon payments, which were due to be paid by the defaulting airlines, have been sourced from a "liquidity pool" until now. However, if this same source of funding is used to pay coupons due in March and June, it will drop below 75% of the original balance, Reuters said. This would then trigger a "remarketing event" in which defaulted debt obligations would be auctioned for cash.

Options being considered include Etihad buying Alitalia's mini-bond within EAP or conversely, the Abu Dhabi-based carrier paying directly into the EAP bonds' liquidity pool, to guarantee coupon payments.