(Bloomberg) -- Air Baltic Corp AS had to offer Europe’s highest coupon bonds so far this year to pull off a last-minute refinancing deal, even with Latvia’s government stepping up to buy a chunk of the debt.

The Latvian airline sold a €340 million ($366 million) junk bond, with a yield of 14.5%, to push back the need to repay debt maturing in two months, according to a person with knowledge of the deal. The high rate pulled in over €840 million of orders, enabling the company to boost the size of the sale and trim pricing from its preliminary offer. 

The airline has struggled to compete with low-cost rivals and has been hit by reduced demand and rising costs in the wake of neighboring Russia’s invasion of Ukraine two years ago. The Latvian government had parliamentary approval to purchase as much as €136 million of the debt, but ended up buying €50 million amid strong investor demand, Transport Minister Kaspars Briskens said on social media platform X. 

“The timing for the bond issuance was good, but we were surprised by how high the yield was,” said Kari Pihkala, a portfolio manager at LocalTapiola Asset Management based in Finland who participated in the deal. 

The bond has the highest coupon seen in the European high-yield bond market since September, when Adler Group paid a 21% coupon, according to data compiled by Bloomberg. While it means that the company will pay nearly €50 million in interest costs a year, the deal was applauded by Latvia’s Prime Minister Evika Silina.

Even Higher Rates

“Air Baltic’s balance sheet had been well scrutinized and the company had counted on an even higher interest rate,” Silina told TV3 television in an interview. “People may be surprised by such a rate but we have to remember that we live with very high interest rates from the European Central Bank, which also affects the Air Baltic deal.”

The ECB has increased its benchmark rate 4.5 percentage points since Air Baltic last issued bonds in 2019, while the airline’s latest bonds carry a coupon of almost 8 percentage points higher than on similar notes it sold five years ago.

Air Baltic was forced to shelve a planned junk sale in October as fears over higher-for-longer interest rates and geopolitical turmoil unsettled markets. Proceeds from the senior secured deal will refinance the company’s €200 million bond maturing in July 2024, as well as help to repay a loan from the state. Normally, firms look to refinance one or two years ahead of time.

Air Baltic has switched the banks on this effort as well as the currency. The new euro bond offering sees BNP Paribas SA taking the lead, alongside bookrunners Citigroup Inc., JPMorgan Chase & Co., Morgan Stanley and SEB AB. On the first attempt, lead bookrunners JPMorgan and Morgan Stanley were planning a benchmark US dollar deal.

BNP Paribas, Morgan Stanley, Citigroup, SEB and JPMorgan declined to comment.

Air Baltic’s Chief Executive Officer Martin Gauss said the refinancing will “substantially boost the company’s liquidity and financial stability.”

The airline is also pursuing a plan for an initial public offering after recording its first annual profit since 2018, and has engaged several advisers with a view to strengthen liquidity and its equity base. The Latvian state owns 97.97% of Air Baltic’s shares, while Danish businessman Lars Thuesen’s Aircraft Leasing 1 owns the rest. 

--With assistance from Hannah Benjamin-Cook, Tasos Vossos and Milda Seputyte.

(Updates to add that investor Kari Pihkala participated in deal in paragraph 4. A previous version misspelt the name of Danish businessman Lars Thuesen in last paragrah)

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