Update: The Lufthansa Group Supervisory Board didn’t initially approve this package, but ended up coming to an agreement with the EU Commission.
After much back and forth, it looks like Lufthansa and the German government have finally agreed to the terms of a bailout.
The basics of Lufthansa’s rescue package
A package worth of up to €9 billion EUR in grants and loans has been approved for Lufthansa Group by the Economic Stabilization Fund of Germany. Here’s how this deal is structured:
- The airline will receive up to €3 billion in credit facilities with the participation of private banks, for a term of three years
- The government will spend up to €6 billion for equity in the airline:
- The airline will get about a €300 million cash contribution to start acquiring shares
- The government will acquire €5.7 billion in shares, €4.7 billion of which is classified as equity; this comes with a guaranteed yield of 4% in 2020 and 2021, all the way up to 9.5% in 2027 (obviously this gets costly over time)
The stabilization package still requires the final approval of the management board and the supervisory board of the company, as well as requiring approval of the European Commission and any competition-related conditions.
Lufthansa has secured a sizable rescue package
The German government will own 20% of Lufthansa
Lufthansa was heavily opposed to the government interfering in the airline. The airline basically wanted money from the government, but didn’t want to give up anything for it.
It seems like the airline and government were able to meet in the middle, where the government will take a (mostly) silent stake in the airline.
With this investment:
- The Economic Stabilization Fund will increase capital by building up to a 20% stake in Lufthansa Group, at the rate of 2.56 EUR per share
- Subject to the full repayment of the loans and a minimum sale price of 2.56 EUR per share plus an annual interest of 12%, the Economic Stabilization Fund plans to sell its shareholding in full at the market price by December 31, 2023
- The Economic Stabilization Fund may increase its stake to 25% plus one share in the event of a takeover of the company
- Two seats on the supervisory board will be filled by the German government, one of which is to become a member of the audit committee
- The airline is prevented from making future dividend payments, and there are restrictions on management compensation, though the full details of that haven’t been revealed yet
The German government will have a 20% stake in Lufthansa
Bottom line
Lufthansa and the government were able to come to an agreement over state aid. Germany will take a 20% stake in the airline, and will mostly be a silent investor, so Lufthansa doesn’t have to worry too much about government interference.
Furthermore, the government’s stake may be sold by 2023, pending repayment of loans and a minimum share price.
What do you make of the German government’s package for Lufthansa?
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