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Rescue packages, Chinese moves rile European aviation space
China’s BOC Aviation converts debt into equity stake in Norwegian Air Shuttle
3 Jun 2020 | Michael Marray

Airline rescue packages are leading to tensions between European governments seeking to defend their industry position and avoid market distortion amid concerns that Chinese firms are snapping up assets of troubled companies in the wake of Covid-19‘s destruction of the market.

The German government was irritated by moves from European Union competition commissioner Margrethe Vestager to attach conditions to its 9 billion euro rescue package for Lufthansa.

Vestager required Lufthansa to permanently give up some of its valuable slots at both Frankfurt and Munich airports, where it is the dominant carrier. Lufthansa management initially opposed any such arrangement, but gave its agreement as it was anxious to press ahead with a capital injection in return for a 20% government equity stake, plus 3 billion euros of state-backed loans.

More similar disputes between national governments and Brussels are likely in the months ahead. And politicians are also warning about moves by Chinese companies to pick up assets of troubled companies.

Aircraft operating leasing company BOC Aviation recently became a shareholder in Norwegian Air Shuttle after converting some of its leasing contracts into equity as part of the rescue plan for the troubled airline.

Though not an EU member state, Norway works closely in regulatory alignment with the EU.

Norwegian completed its recapitalisation plan on May 20, with the signing of a loan guarantee of NKr3 billion (US$290 million) from the Norwegian government.

A condition of that loan guarantee was the completion of a recapitalisation plan announced earlier in the month.  

That recapitalisation included the conversion of a substantial part of the company’s bonds and lease obligations into equity (debt conversion) as well as a share offering with gross proceeds of NKr400 million. Norwegian is listed on the Oslo Stock Exchange.

Some of Norwegian's major lessors agreed to convert their future lease payments into equity. Many aircraft in the Norwegian fleet are on operating leases, which typically run from eight to ten years. Instead of repossessing the aircraft in an environment in which it would be hard to re-lease the aircraft to other carriers, the lessors agreed to convert NKr9.1 billion of these lease obligations into equity.

BOC Aviation, majority owned by Chinese state controlled Bank of China, now holds a 12.67% stake in Norwegian, while Amsterdam based AerCap Holdings will become the biggest shareholder with 15.9%.

Three bonds issued in US dollars, euros and Swedish kronor equating to NKr3.6 billion have been converted into a mixture of equity and perpetual bonds.

Payment for the allocated offer shares was made on May 20.

Under the framework of the state aid package, the company entered into a NKr2.99 billion  state-supported term facility agreement arranged by DNB Bank (DNB). Garantiinstituttet for eksportkreditt (GIEK) acts as guarantor according to the state guarantee scheme with liability (including interest) limited to Nkr 2.7 billion. DNB and Bank Norwegian are acting as lenders in the commercial risk tranche of NKr300 million. The facility is unsecured, non-amortizing and matures on March 31 2022.

According to Norwegian, it has now converted NKr12.7 billion of debt to equity and laid a solid foundation for the future. It adds, however, that the next months will remain challenging as there is a high degree of uncertainty in the industry.

"Norwegian will still need to collaborate closely with a number of creditors as the company currently has limited revenues,” says Jacob Schram, Norwegian’s chief executive officer.

The company has developed a new strategy and business plan for a strengthened airline, renamed New Norwegian, set to re-emerge when travel restrictions are lifted and demand returns.

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