airBaltic’s €350 Million Rescue: Who Bears the Financial Risk?

The Latvian airline has received €140 million in emergency funding, but its Chapter 11 restructuring is opening a dispute over the value of aircraft collateral, creditors’ repayment rights and the future of state ownership.

On 19 October, the US Bankruptcy Court for the Southern District of New York is scheduled to consider the next stage of airBaltic’s €350 million emergency financing package.

The Latvian airline has already received €140 million following an interim court order issued on 16 September. The latest hearing concerns final approval of the first €175 million tranche, including the remaining €35 million, and the framework for further borrowing.

However, a more consequential dispute remains unresolved. Existing bondholders are challenging the proposed priority of the new lenders over assets securing airBaltic’s debt.

The central issue is no longer simply whether the airline can obtain enough cash to continue operating. It is how the financial burden of its restructuring will be distributed among new lenders, existing creditors and shareholders.

From liquidity crisis to Chapter 11

airBaltic entered Chapter 11 on 14 September after months of unsuccessful efforts to secure sufficient financing outside court.

The company’s financial position had deteriorated sharply. Its first-half results, published on 12 October, showed revenue rising 14.2% to €399.2 million, but a net loss of €128.2 million, compared with €1.7 million a year earlier.

Higher aviation fuel prices added to existing financial pressures. According to restructuring materials, the airline entered 2026 with approximately 90% of its expected fuel consumption unhedged, leaving it particularly exposed to price increases.

Fuel costs were not the only problem. The airline also faced substantial aircraft leasing commitments, financing expenses and operational constraints related to its fleet.

According to financial information submitted in the Chapter 11 proceedings, airBaltic entered the process with approximately €503.3 million in funded debt and €855.6 million in operating lease liabilities.

The funded debt included approximately €398.2 million relating to its secured bonds due in 2029, which carry a 14.5% interest rate.

The airline reported only about €1.13 million in available cash when it filed for Chapter 11 on 14 September, before receiving emergency financing.

In August, bondholders had already agreed to capitalise scheduled interest payments and suspend a minimum liquidity requirement, providing temporary relief.

The airline subsequently selected a different financing package, arranged by Strategic Value Partners, and entered Chapter 11 proceedings.

The cost of emergency financing

The DIP facility provides for borrowing of up to €350 million from lenders including Barclays, Hayfin Capital Management, Morgan Stanley, Oaktree Capital Management and Strategic Value Partners.

The first €175 million tranche is being considered separately from two further tranches of €125 million and €50 million.

The financing is expensive. Its stated interest rate is linked to SOFR plus eight percentage points, equivalent to approximately 12% when announced. Although the loans are denominated in euros, the contractual benchmark is the US dollar-linked SOFR rate.

The original financing terms also included three substantial fees: a 5% backstop commitment fee, a 5% upfront fee and a 5% exit fee.

Calculated against the full €350 million commitment, these charges would total approximately €52.5 million, excluding interest and potential additional payments.

In their 15 September court objection, bondholders argued that €35 million in commitment-related fees had effectively accrued when the financing agreement was signed, before the airline received the money.

These figures describe the financing structure presented in the court proceedings. They do not mean that every fee has already been paid or that all €350 million is available for immediate use.

The new credit provides essential liquidity, but it also creates substantial additional obligations for the company emerging from restructuring.

The dispute over eight aircraft and seven engines

The most significant disagreement concerns the collateral supporting the new financing.

Under the proposed arrangement, part of the first DIP tranche is used to repay financing obligations connected with eight Airbus A220-300 aircraft and seven spare engines.

The repayments would allow airBaltic to acquire ownership of the equipment and provide the new lenders with first-priority security over it.

Existing holders of the 2029 bonds argue that they already have rights to the surplus value of these assets under their security arrangements.

In a limited objection filed on 15 September, an ad hoc group of bondholders, including Klirmark Capital, challenged the consequences of this transaction.

The group referred to an earlier company valuation indicating that bondholders’ interests in aircraft and engine collateral could amount to approximately €255 million.

It argued that transferring the assets into the new lenders’ security package could undermine existing creditor protections without adequate compensation.

This is a contested valuation and legal claim, not an established loss of €255 million.

The dispute involves two important restructuring concepts: priming liens, which can give new lenders priority over existing secured creditors, and adequate protection, intended to protect creditors whose existing security interests may be affected.

The 19 October proceedings concern the final DIP financing order. The broader issue of granting new lenders priority over the 2029 bond collateral has been separated for further consideration, provisionally scheduled for 17–18 November.

In a filing dated 12 October, Klirmark stated that it did not oppose entry of the proposed final DIP order, while expressly reserving its rights to challenge any later priming arrangement.

The distinction is important. Creditors may accept the airline’s immediate need for financing while contesting the terms under which their existing security could be weakened.

Latvia’s position as controlling shareholder

The Latvian state remains airBaltic’s controlling shareholder with 88.37% of voting rights. Lufthansa owns 10%, while private investors hold the remainder.

The state is therefore exposed to the restructuring in several ways.

First, the value of its existing equity depends on the outcome of the reorganisation and any new capital structure agreed with creditors and investors.

Second, Latvia remains a creditor. The airline entered Chapter 11 with approximately €18.6 million outstanding under a subordinated government loan.

The restructuring also involves claims held by Latvian public institutions, creating further potential consequences for public finances.

These exposures should not be treated as realised losses. Their ultimate value will depend on the restructuring plan, creditor recoveries and any future investment arrangements.

The experience of Scandinavian Airlines offers a relevant precedent.

airBaltic CEO Erno Hildén previously served as SAS’s chief financial officer during its Chapter 11 restructuring, which also involved Seabury, now an adviser to airBaltic.

SAS emerged from restructuring in August 2024 with new investors and a substantially reduced debt burden. Its existing shares were cancelled, leaving former shareholders without recovery.

The SAS outcome does not establish what will happen to Latvia’s shareholding in airBaltic. It does, however, demonstrate that preserving an airline’s operations and preserving the value of its existing equity are separate objectives.

The next decision

airBaltic plans to emerge from Chapter 11 around June 2027 with a smaller fleet, reduced financial obligations and a more concentrated operating model.

The immediate question is whether its financing arrangements will provide sufficient liquidity to complete that transformation.

The longer-term question concerns the distribution of value. New lenders expect priority protection for their financing, existing creditors are defending their collateral rights, and Latvia must consider both its investment in the airline and its strategic interest in maintaining air connectivity.

The October hearing addresses the first stage of this process. The planned November proceedings could be more significant in determining how the competing creditor interests are treated.

Until the restructuring plan is agreed, the cost of airBaltic’s recovery cannot be measured simply by the €350 million it has been promised.