Air Serbia (JU, Belgrade) has notified EA Partners I and II, two Netherlands-based special purpose vehicles belonging to Etihad Airways (EY, Abu Dhabi Int'l), of a potential default under two debt obligation agreements. The Serbian flag carrier said it is hoping for a suitable and mutually acceptable outcome.

Air Serbia is jointly owned by the government of Serbia, which holds a 51% stake, and Etihad Airways, which owns a 49% interest and management control.

It notified the limited liability private companies EA Partners I BV and EA Partners II BV of the possible default on June 3, saying it may not be able to meet its obligations to debt agreements signed, respectively, on September 15, 2015, and May 20, 2016, the two SPVs said in separate filings to the London Stock Exchange.

The flag carrier blamed the impact of the coronavirus, which closed airports in Serbia to inbound and outbound flights on March 19, the notices said, and it stressed its willingness to begin talks to find a mutually acceptable resolution.

In September 2015, Etihad Aviation Group closed a USD700 million secured bond via EA Partners I to finance Etihad Airport Services and carriers the group had bought stakes in, such as Air Berlin, Air Serbia, Air Seychelles, Alitalia, and Jet Airways. In May 2016, a USD500 million platform financing transaction was completed via EA Partners II, by Etihad Airways, Etihad Airport Services, Air Berlin, Air Serbia, Air Seychelles, and Alitalia.

Most of the funds raised were used for capital expenditures, fleet investments, and refinancing. The EA Partners structure had been designed in 2015 to provide financing for the airlines while leaving Etihad's balance sheet comparatively unaffected.

As previously reported, sources told Reuters on May 21 that investment funds holding USD1.2 billion in debt issued by Etihad Airways and the airlines it owns stakes in had given it an ultimatum to restructure the two bonds or face possible legal action. The debtholders confidentially proposed that Etihad agree to restructure the bonds, which are due in September 2020 and June 2021, but Etihad had not yet responded, the sources said. Air Serbia's potential default adds to the bad news for the bondholders.