Equitization has started

Azul has started the equitization of the first 35% of its 2029 and 2030 bonds, as planned under the out-of-court debt restructurings agreed earlier this year. The price that was fixed for bondholders to exchange was BRL 3.58 per preferred share, meaning the price of each ADR was USD 1.89 at today’s exchange rate of BRL/USD 5.68 (1 ADR = 3 preferred shares).

However, the shares closed on 23 April at USD 1.55, and on 24 April (after the announcement) at USD 1.13, or 27% lower. And on 25 April, they closed at USD 0.83, after trading as low as USD 0.48.

There is a caveat to this. The 2029 bonds, for example, traded on 31 March at 50 and on 28 April in the low 20s. The conversion from bonds to equities was done at par, meaning for each USD 1,000 in bonds, one received USD 350 worth of shares at USD 1.89 per ADR. However, those who bought them in the last month effectively bought these shares with a 50%-80% discount. For example, if one paid 50 cents on the dollar for these bonds, the cost of USD 1,000 notional was USD 500. As the conversion is at face value, it would be like buying shares at USD 0.945 per ADR, so even at USD 1.13, the profit for a trade of less than a month was substantial (if the bonds were purchased at 20 cents on the dollar, the implied purchase price for each ADR was USD 0.38, and the return would be 2x) (See Table 1).