An Amsterdam-based special purpose vehicle called SPV Equity Alliance Partners (EAP) was set up in 2015 and issued two bonds for Etihad and other airlines it partially owned at the time, including Alitalia and Air Berlin, which are both now insolvent.

The bonds are quoted at a discount of more than 25 cents on the dollar after Alitalia entered special administration and Air Berlin filed for bankruptcy protection last year.

Etihad could now end up spending hundreds of millions of dollars to keep the bond structure alive, although it is not legally obliged to do so as there is no cross-default provision in the bond documentation, the sources said.

With more than $400 million of EAP debt in the hands of United Arab Emirates investors, there is political and reputational pressure on the Abu Dhabi carrier to avoid a default in March and Etihad is holding internal talks to assess whether and how to support the bonds, the sources said.

An Etihad spokesman declined to comment on the bonds, the proceeds of which were used to enter into separate debt obligations with each entity involved, with those of Alitalia and Air Berlin each amounting to around 19 percent.

Until now a credit enhancement mechanism has covered coupon payments which were due to be paid by the defaulting airlines, but if this “liquidity pool” is used to pay coupons due in March and June it will drop below 75 percent of the original balance.

This would trigger a “remarketing event” in which defaulted debt obligations would be auctioned for cash, according to the documentation of the EAP bonds, a $700 million bond maturing in 2020 and a $500 million bond due to be repaid in 2021.

Etihad spent billions of dollars on airline acquisitions that failed to deliver expected returns. The state-owned airline once owned minority stakes in eight other carriers.

At the time of the bond issues through EAP, they were seen as strengthening Etihad’s partnerships with the other airlines. However, it has since sold two, while Alitalia and Air Berlin have declared insolvency.

Etihad posted its first loss in six years in 2016 and began a strategic overhaul. Last month it pulled its Airbus freighter fleet from service and asked some pilots to take unpaid leave.

COMPLEX SOLUTIONS

None of the potential solutions are straightforward, the sources said, but Etihad could reach one over the next few weeks and one idea being considered, two sources said, is that Etihad could buy Alitalia’s mini-bond within EAP.

Etihad agreed at the end of 2016 to repay the principal of Alitalia’s portion of debt issued by EAP, equivalent to $235 million. But this was signed before Alitalia’s workers rejected a restructuring plan for the Italian carrier in early 2017, leading the company to bankruptcy.

With Alitalia now under administration, it is not clear whether the agreement would succeed in repaying Alitalia’s debt in the EAP bonds, as it could be used by the administrator to repay Alitalia’s more senior creditors.

Alitalia did not respond to a request for comment.

Another option might be for Etihad to pay directly into the EAP bonds’ liquidity pool, to guarantee coupon payments.

“If Etihad does nothing, they’ll end up paying a lot. If they don’t try to save EAP, their reputation for sophisticated financial management would take a battering,” one source said.