Lufthansa's US$9.8 billion bailout bogged down in talks with EU

Germany is close to making a formal offer to bail out Deutsche Lufthansa AG even as talks to ensure swift approval from the European Union drag on, according to people familiar with the matter.

The committee that manages Germany’s WSF Economic Stabilization Fund is set to meet later on Monday to discuss a 9 billion-euro (US$9.8 billion) aid package, a person familiar with the matter said.

The meeting -- delayed repeatedly in recent days -- is an indication that Germany is prepared to formalize an offer, though the situation remains delicate.

The German government and Lufthansa have reached an agreement in principle on a bailout package, German news agency DPA reported Monday, without citing the source of the information. An economy ministry spokeswoman later told a regular news conference that talks are in the “end phase.” A spokeswoman for Lufthansa declined to comment.

Chancellor Angela Merkel’s administration had aimed to issue a formal offer to the airline this past weekend, but talks between Germany, Lufthansa and the European Commission have held up the plan, said the person, who asked not to be identified because the talks are confidential.

While Lufthansa fought for weeks to limit government interference, its management board is expected to approve the deal quickly before asking the firm’s supervisory board to vote on it, according to people familiar with the matter.

The airline last week warned its need for assistance was “urgent” after the coronavirus crisis grounded most of its fleet.

Exit Plan

A timetable for the German government to sell an eventual stake in Lufthansa is one of the details that still needs to be ironed out, said the person.

The discussions are complicated because competitors have vowed to challenge the aid package for Europe’s largest airline.

The basis of a rescue deal came together last week as Germany seeks to rescue its flag carrier from the fallout of the pandemic.

Under the plan, Germany would become the largest shareholder in the airline, which plans to resize for what Lufthansa warns could be years of depressed demand.

The company’s shares rose as much as 8.1 per cent to 8.69 euros and was up 5.1 per cent at 12:46 p.m. in Frankfurt trading. The stock has nearly halved this year, valuing the company at 4.1 billion euros.

In talks with the EU, the pace of repaying the aid is also an issue. Lufthansa would face a three-year deadline for paying back the bailout package, Bild am Sonntag reported on Sunday.

That’s a faster rate than one implied by the company. Chief Executive Officer Carsten Spohr has previously said the company is expected to reimburse as much as 1 billion euros a year.

Silent Participation

The German aid package would include a 20 per cent direct government stake in Lufthansa, a convertible bond equivalent to a 5 per cent plus one share and a 3 billion-euro loan from state development bank KfW.

There’s also plans for a so-called silent participation -- a debt-equity hybrid instrument that wouldn’t dilute shareholder voting rights. The securities have relatively high guaranteed dividends, while lacking voting rights and the potential upside from share gains.

In the Lufthansa deal, the German state’s direct holding is for stock with a nominal price of 2.56 euros, a level that all but guarantees a taxpayer profit if the state props up the airline. The parties are also discussing a capital-cut option that would see the company issue shares below that price, Lufthansa said in a statement last week.

Bailout Package

• While the terms of Germany’s aid package for Lufthansa haven’t yet been disclosed, here’s what the key elements of a deal could look like:
• 20 per cent direct stake (roughly 330 million euros, based on nominal value of 2.56 euros for about 128 million shares)
• 5 per cent plus one share via convertible bond (roughly 90 million euros, based on nominal value for about 32 million shares)
• loan for 3 billion euros from state development bank KfW, the company has said
• roughly 5 billion euros in silent debt-equity participation, people familiar with the plan have said.

Under EU state-aid guidelines loosened this month to help alleviate the economic damage of the coronavirus crisis, member states should scale down stakes they buy in listed companies within six years.

The EU’s competition unit also banned payouts like dividends and bonuses for top executives, while barring companies from taking more than a 10 per cent stake in rivals, suppliers or customers.

German Economy Minister Peter Altmaier said in an interview on Saturday that an exit strategy must be part of the plan. Lufthansa is also poised to receive assistance from Switzerland, Austria and Belgium, where it owns units.

Ryanair Challenge

Governments can set stricter conditions on aid to limit potential harm to rivals who don’t get similar help.

Ryanair Holdings Plc has already challenged the bailout of Air France-KLM and vowed to do the same with Lufthansa, complaining that the German flag-carrier would exit the crisis stronger while lower-cost airlines that don’t get aid will compete “with two hands tied behind our back.”

The European Commission declined to comment, referring to an earlier statement that regulators were in constant contact with national governments and were “very well aware of the difficult situation that the aviation sector is facing due to the coronavirus outbreak.”

But the commission has also warned in recent weeks of growing divergence within Europe as Germany accounts for more than half the 1.95 trillion euros in Covid-19 state aid approved by EU regulators.

--With assistance from Eyk Henning, Aoife White, Patrick Donahue and Iain Rogers.