Here is a link to a travel publication article by a senior figure within Deloitte LLP, a global provider of audit services talking about airlines facing “Zombie Debt Risks” due to the ongoing effects of Covid-19 on aviation.
This is a key quote from the article:-
“The danger is that the debt becomes unsustainable and “a company becomes a zombie”, he said, explaining: “It doesn’t have the ability to grow because it’s spending too much on servicing the debt.” This is the same phenomena suffered by home owners who experience ‘negative equity’, a term that might be more familiar. This occurs when a homeowner is paying off a mortgage which has a greater value than the price of their home. Selling their home, usually the only asset it does not raise enough money to clear the debt, (mortgage), and so they are trapped unable to escape from the debt.
The article mentions the need to balance debt and equity, which translates into non-finance speak as the need to balance the amount owed by a company compared to its overall value. The article also mentions the practice of issuing new shares to raise capital or to ask for those debts to be taken as share equity. Here a company’s debt is converted to shares, which again simply provides additional funding for a company. This technique was widely used during the Financial Crisis in 2008, but has the disadvantage that a company loses control, as it has more shareholders and also more bodies (shareholders) to share any eventual profit with.
So has LBC in the way that it is sole shareholder and loan provider for LLAL, created not only a “Zombie” company, but in fact a “Vampire Zombie” company?
If LLAL has to raise income by selling new shares, (as previously described) then LBC has to fund from public services the funds to buy those shares, or open itself up to a Shares Issue i.e. creating new shareholders. Would anyone actually buy shares in such a debt-laden company?
This could mean that LBC would no longer be the majority shareholder and lose control of the town’s only asset. Would LBC take out more shares in LLAL in lieu of debt repayments? It would not create any extra income, as it would be the same dividend just divided over more shares. The outstanding loans would still have to be paid, and that money found.
The only way LBC can keep financing LLAL is by cutting services to Luton. It is already planning an extra £4 million of cuts for 2021/22, whilst still granting new loans of circa £40 million to LLAL in the same year.
We believe that this shows Luton Airport is already a “Zombie” and animated only by feeding off the life blood services of Luton making it that “Vampire Zombie”. LBC have willingly created this monster, and it would seem they intend to keep feeding it the blood of the town’s service, whatever cost that brings?