National carrier El Al Israel Airlines Ltd. (TASE: ELAL) is heading towards a huge debt settlement under government sponsorship. The details of the debt settlement will be agreed in the coming days or week and will be presented to the public.
In the background, hovers a May 14 deadline, the final date for El Al to present its 2019 financial results. El Al received a special extension of two weeks from the Israel Securities Authority in which to present its results and estimates are that if an arrangement for the airline to receive government guaranteed loans is not achieved before that date, then the auditors will attach a 'going concern' warning to El Al's results, that could be the beginning of the end for the airline.
Any El Al debt settlement is likely to be similar to the debt settlement which Zim Integrated Shipping Services Ltd. underwent. The similarities are reflected in the scale of the debt (El Al owes about $3 billion), and in the fact that Zim, like El Al, had been privatized and encountered difficulties after an ambitious procurement plan followed by the 2008 financial crisis.
In contrast to Zim, where the price of the debt settlement was paid mainly by the company's creditors (banks, shipping companies and bondholders), and the owner Idan Ofer, in the case of El Al the State planned putting its hands in its pockets and providing loan guarantees for hundreds of millions of dollars for the loans needed to ensure the continued existence of the carrier, which is owned by the Borowitz family's Knafaim Holdings Ltd. (TASE: KNFM).
The similarity between Zim and El Al begs the question asto what lessons were learned from the Zim debt settlement. In fact the best person to answer that is Ministry of Finance director general Shai Babad, who was a senior executive at Zim between 2008 and 2013.
Babad is now playing a major role in drawing up El Al's debt settlement. The proposal that he is leading in the negotiations with El Al revolves around a package deal: the company will streamline, and the institutions financing the airline will agree to reduce and postpone repayment of debts. If these terms are met in full, Babad is prepared to provide state guarantees of up to 75% of $400 million in new credit, which should allow El Al to successfully get through the coronavirus crisis.
These guarantees could cost the State (if El Al is unable to meet its commitments) billions of shekels, money that would be injected into a private company with a current market cap of just NIS 350 million.
Finance Ministry officials split over whether to demand El Al shares
What has yet to be put on the negotiating table is a State demand to receive part ownership of the airline. Babad apparently does not see such a demand as realistic and he declined to answer questions from "Globes" on the matter. Some believe that El Al shares would only give headaches to its owners.
But not everyone sees it that way, even in the Ministry of Finance itself. Sources inform "Globes" that during internal Ministry of Finance discussions Accountant General Rony Hizkiyahu has supported the idea of receiving El Al shares in exchange for government assistance. Hizkiyahu reportedly sees it as a matter of principle: shares for public money. Giving public money for nothing, the Accountant General thinks, strengthens claims that the assistance is only to bail out the company's shareholders and not the company itself.
International experience shows that the demand for shares in exchange for assistance is legitimate. The German government wants a 25.1% stake in Lufthansa and the right to appoint directors in exchange for a €5 billion bailout while the German carrier's pilots have agreed a pay cut. Lufthansa was a profitable airline, unlike El Al, which has gotten into temporary difficulties because of the crisis.
El Al has grounded its passenger fleet, except for occasional flights to bring home Israelis stranded abroad, and will not restart flights until at least May 30. At the same time it has expanded cargo operations and is carrying out 60 cargo flights from Wuhan, China to London, Paris and Frankfurt via Tel Aviv.
Competition and Dreamliners put El Al $3 billion in debt going into the crisis
The coronavirus crisis caught El Al at a bad time as growing competition hampered the carrier's attempts to return to profitability, while the carrier is in the midst of massive procurement from Boeing of 16 new Dreamliner jets.
To stay alive, in addition to its talks with the Ministry of Finance, El Al is battling on two fronts - with the banks and its workers committee. El Al has been in talks mainly with Israel Discount Bank (TASE: DSCT) and Bank Leumi (TASE: LUMI) regarding new financing while Bank Hapoalim (TASE: POLI) is also in the picture. Ideally El Al would like the loan from one bank or maybe several. The banks are waiting for the green light from the Ministry of Finance, which is waiting for a possible repayment schedule from the banks.
The Ministry of Finance is also waiting for agreement from the employees to an aggressive streamlining plan. Some see the streamlining plan as an inevitable result of the coronavirus and the sharp fall in operations, while others argue that El Al has needed to downsize for a long time.
The streamlining plan calls for the airline to shed 33% of its 6,300 employees, cut salaries, cut its fleet from 45 planes to 35 and reduce the number of routes it flies including planned new destinations like Tokyo. While support of the workers committee will be critical, El Al will struggle to sell any planes on a global market where there are likely to be many sellers after the crisis and few buyers.
El Al's pilots have already agreed to a 20% salary cut and their pay is likely to fall 30%-40% because of reduced schedules. El Al has 650 pilots (530 are currently on unpaid leave) and other employees like to say they are 10% of the workforce who get 90% of salaries.
El Al workers committee understands the need for streamlining and will fight hard to keep layoffs and salary cuts to the minimum but is optimistic that agreement can be reached.
Published by Globes, Israel business news - www.globes-online.com - on May 6, 2020
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