UK - Trustees of the British Airways pension schemes have handed £330m (€382m) of contingent assets back to the airline as part of an effort to try and help improve the firm's liquidity and avoid insolvency.

British Airways (BA) today announced to the London Stock Exchange it had launched a £300m convertible debt issue and had "agreed terms with the trustees of its defined benefit (DB) pension schemes in the UK to release some bank guarantees back to the airline".

The company runs two UK DB schemes - the New Airways Pension Scheme (NAPS) and Airways Pension Scheme (APS) - which were granted bank guarantees of around £330m in 2006 as part of a deal to allow changes to the scheme such as a higher retirement age and a lower accrual rate. (See earlier IPE article: BA in €1.4bn pension deficit bailout)

However, the guarantees were only available to trustees of the schemes in the event of BA becoming insolvent, so although the schemes currently have a deficit of £1.46bn, it may have made more sense to use the assets to try and avoid insolvency rather than wait and hope it meets the pension shortfall, suggested consultancy firm Punter Southall. (See earlier IPE article: BA's pension deficit hits £1.46bn)

Danny Vassiliades, principal and head of corporate advice Punter Southall, commented on the developments: "They appear to have concluded the balance of members' interests lies in giving up this ‘insurance', which would not have met the full shortfall in the scheme, to reduce the risk of insolvency occurring."

He admitted it is not clear if the trustees were offered anything else in return, but noted if the airline "had gone insolvent with a big enough deficit in the scheme the guarantee would have benefited the Pension Protection Fund (PPF) rather than members. This may have been a consideration for the trustees in choosing to give it up".

In a statement, the pension trustees said it had agreed to BA's request for the guarantees after taking "extensive financial, actuarial and legal advice".

It stated: "If required, the trustees have agreed to release to BA the £230m guarantee available to APS and the £100m guarantee available to NAPS. In the case of APS, the existing guarantee will be replaced with alternative security. This will allow BA to use the financing facility that underpins the current guarantees to improve its liquidity position."

The trustees added they are "satisfied that this measure taken together with other corporate activities and initiatives will serve to improve the financial position and prospects of the company with a view to meeting its obligations to the scheme".

A spokesman for the schemes' trustees said they had to make a decision whether or not to hold onto the guarantees and risk deteriorating BA's position or to help the airline out, and it was felt that by helping out the firm it provided more security for the members.

The deal means the airline can draw up to £330m in cash at any time until 21 June 2012, which together with the convertible debt issue should give it an extra £600m of liquidity to bring the total to £2bn, as BA admitted it expects to report an operating loss of £100m for the quarter ending June 2009.

Willie Walsh, chief executive of BA, said: "Following discussions with institutional investor, we're taking action to improve our liquidity and strengthen our position within the industry."

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