Sigrún Davíðsdóttir's Icelog

Wow Air, the bold newish privately owned air company on the Icelandic aviation market had planned to be done by now with a bond offering, organised by Pareto Securities, Norway. Closing the offering has been postponed, indicating the bond market is sitting on its hands. The news over the last two weeks has been of a flurry of meetings with no outcome. A presentation on Pareto’s website indicated a weak financial position, which makes the attempt to sell bonds rather unconvincing – and the planned IPO in 18 months more a wishful than a realistic aim.

Tourism is now the largest contributor to balance of payment in Iceland. At the same time, tourism is a major risk factor in the Icelandic economy. Part of that risk is related to aviation – two air companies dominate the aviation market, Icelandair and Wow Air. The news of Wow’s shaky bond offering has rattled the Icelandic króna and the stock market.

Wow Air is privately owned but is now clearly in major financial difficulties. The Icelandic media seems tongue-tied, plenty of rumours but little clarity. One thing seems certain: the bond offering that Pareto Securities launched in August did not seem to be going as hoped.

After silence and then upbeat statements from Wow many questions remain unanswered. Wow has now promised a statement today, Tuesday 18 September.

The much announced bond offer

Over the years, news as to what Wow would do has been a bit here and there. Last year, Skúli Mogensen said to Bloomberg the airline might be sold within the next two years. Finding other shareholders has also been in the air. Now, he aims at an IPO in 18 months. The losses last year were ISK2.4bn, that is around €19m or $22m.

In the meantime, Wow needs to stay in the air. The bond offering now was supposed to give a financial boost of around ISK12bn, €94m or $110m, but half that would be a minimum. After the offering opened the conditions were changed, making the bonds convertible. And the minimum proved elusive. The Icelandic banks and pension funds were courted and apparently put under serious pressure, as there were fears of reputational damage and a nose-diving króna.

Part of the problem is that equity is next to none, something that Wow’s owner nonchalantly mentioned in an interview with the Icelandic Morgunblaðiðin spring. In addition to losses last year and this year, with rising oil prices. Wow does not own any airplanes, which makes it difficult to find any tangible collateral.

In an interview yesterday with the Financial TimesMogensen did not mention the bond offering, only that Wow Air was aiming to raise $200m to $300m in an IPO within 18 months. Those who have studied Wow’s available financial information scratch their head – it is hard to see anything that indicates a turn-around except for Wow’s own very optimistic forecast.

From Oz to Wow

With his predilection for short and sassy company names, Skúli Mogensen had his second coming in the Icelandic business community as the owner of Wow Air in 2012. The first one was in the 1990s as one of the founders of the Icelandic dotcom sputnik Oz. Oz crashed but the experience spawned many other IT companies in the following years as Oz founders and staff kept going elsewhere.

Mogensen however left Iceland and ran Oz Communications in Canada, selling it in 2008 to Nokia. Since it was a private deal little information is available. However, it seems that in spite of rapid and bold, some might say hubristic, expansion the company has been under-financed from the beginning, according to an Icelog source. In may ways, the Wow saga is similar in audacity to the Icelandic banks expansion after 2000.

One of the unanswered questions regards Wow’s debt to Isavia, the state-owned company that runs Keflavík Airport. Morgunblaðið claims Wow’s debt to Isavia is ISK2bn; the number I’ve heard is ISK1bn. If it’s the case that Wow has been allowed to run up a debt to Isavia or has secured more favourable terms than its competitors that is a serious issue. Sadly, that will remind Icelanders of how certain large shareholders in the collapsed banks were allowed to bank on wholly unsustainable terms.

Low-cost carriers are feeling the strain. The business model of offering stop-over in Iceland is also being tested. All of this is at play in the Wow cliff-hanger saga.

*According to Wow Air statement at 3pm Icelandic time, the bond offering has now been closed. Wow Air issuing €60m, €50m of which have already been sold:

*** WOW air – New Bond Issue – Book is closed ***

Tenor…………………3yrs

Issue Size……………EUR 60mm

Coupon………………3m Euribor +9% (Euribor floor at zero) + warrants

Update: Recently, Icelandair made a bid to buy Wow Air. The offer was dependent on due diligence ending this week, in time for Icelandair shareholder meeting on Thursday. According to unconfirmed Icelog sources, the state of affairs at Wow Air is not looking very promising, making it less likely that the sale will go through. Were that to happen, Wow Air would go into receivership. Today, the Icelandic Stock Exchange stopped trade in Icelandair shares, on demand of the FME, the Icelandic financial regulator.

Update 29 November, 9:30: Icelandair has just announced that it’s not going ahead with buying Wow Air, as it had announced, due diligence pending, November 5. Wow CEO Skúli Mogensen recently announced there were other possible buyers. I doubt they will materialise, more likely this is the end of Wow…

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