SAS AB risks a credit downgrade from Standard & Poor’s if the Scandinavian airline follows through with plans announced this week to convert debt into equity. 

This week, the Stockholm-based airline said it planned a number of measures, including a rights offering and swapping hybrid and unsecured debt for equity, to raise capital and lower its debt levels, while repositioning the business coming out of the Covid-19 pandemic. 

Such debt restructuring measures are typically viewed by the ratings agency in the same way as a default, because they usually result in creditors receiving riskier assets like stock instead of being fully repaid in cash.

“We could downgrade SAS if we view an imminent credit or payment crisis, or that the airline participates in transactions considered akin to default,” S&P said in an April 2021 report warning of a liquidity crisis over the following 12 months.

S&P declined to comment beyond the April report. It currently rates SAS at CCC, three steps above default, indicating vulnerability to non-payment. Moody’s Investors Service meanwhile rates the company Caa1, three steps above the category that is likely in or very near default. Both of these ratings are on negative outlook.

SAS said it doesn’t comment on credit rating changes.  

Pandemic Restructuring

The airline relied on a bailout from Sweden and Denmark to survive the outbreak, which has stifled demand for air travel for more than two years. The shares have lost more than half their value since the start of the coronavirus pandemic, including dilution from earlier debt restructuring. 

As part of the rescue plan in 2020, SAS converted about 2.25 billion kronor ($242 million) of fixed-rate bonds into common shares and 1.6 billion kronor of junior ranking notes with a perpetual maturity, or so called hybrids.

Even as it addresses its finances, the airline faces a crowded field for leisure travel as it pivots toward holiday and so-called friends-and-family vacations, facing up against a restructured Norwegian Air Shuttle ASA and other low-cost carriers.

The business travel that SAS and other network carriers have relied on in the past has dropped off dramatically during the pandemic, and is likely to return slowly if at all given pressure on all businesses to lower carbon emissions.