Investment funds holding USD1.2 billion in debt issued by Etihad Airways (EY, Abu Dhabi Int'l) and the airlines it owns stakes in have given it an ultimatum to restructure two bonds or face possible legal action, two sources have told Reuters.

Etihad's strategy of aggressively buying stakes in airlines from Europe to Australia started to fly into difficulties in 2016. By 2019 it had lost a total of USD4.75 billion, and in March 2020 it posted a further loss of USD870 million for full-year 2019 despite USD5.6 billion in revenue.

A month ago, a steering committee of debtholders - mostly local and international investment funds - confidentially proposed that the carrier agree to restructure bonds due in September 2020 and June 2021. Etihad has not yet responded, the sources said.

The proposal involves extending the maturity of the debt by up to three years in exchange for Etihad Aviation Group, which is wholly owned by the government of Abu Dhabi, guaranteeing the repayment of loans that were made to carriers the group bought stakes in, such as Air Serbia, Air Seychelles, Aer Lingus, and Virgin Australia.

The cash received for the debt, which Etihad issued in 2015 and 2016 via a special purpose vehicle, EA Partners, was distributed to Etihad Airways and the other airlines. Each airline was required to pay off its own part of the debt, according to the deal's documentation.

Under the new proposal, however, creditors have offered to write off USD344 million of the debt owed by insolvent Air Berlin and Jet Airways, although the portion owed by Alitalia would be included in the refinancing and may be demanded from Etihad itself.

Contacted by ch-aviation, Etihad Airways declined to comment on the story.