The German government and the county’s largest carrier Lufthansa have finalized a bailout package worth $9.8 billion, following weeks of negotiations.
Under the agreement, the German government will receive a 20% stake in Lufthansa in exchange of bailing out the airline for $9.8 billion. The deal will also grant the government two seats on the company’s supervisory board.
In a statement released on Monday, Lufthansa said that the company’s executive board supports the “stabilization package” approved by Germany’s Federal Economic Stabilization Fund. The fund is being used by the government to help companies affected by the coronavirus pandemic.
The rescue deal involves the government injecting up to $6.2 billion into the airline, earning a return that begins at 4% this year and in 2021 before increasing the year after.
The bailout also includes a three-year credit facility of up to $3.3 billion, most of which will come from KfW, the state-owned development bank.
In return, the German government will receive a 20% stake in Lufthansa for $2.79 per share or approximately $327 million. There is also an option for the government to increase its stake to 25% plus one share, giving it the ability to hamper any potential takeover.
Lufthansa may be able to repurchase its shares in full by the end of 2023, provided that it has made a full repayment of the government’s $6.2 billion investment and the share price is above the purchase price.
This year, the stock of the company has almost fallen by 50%, closing at $9.41 in Frankfurt on Monday.
The government released a statement saying: “Before the pandemic, the company was healthy and profitable and had good prospects for the future, but it faces an existential emergency because of the current corona crisis.”
“The federal government’s stabilization package takes into account the needs of the company as well as the needs of taxpayers and employees of the Lufthansa Group,” the government added.
The German airline reported a €1.2 billion loss for the first quarter of the year and does not foresee global aviation to recover from the pandemic for several years. As a result, the company is closing down its discount carrier, Germanwings, and plans to cut 10,000 jobs.
As part of the deal, the German government will fill in two seats on Lufthansa’s supervisory board, one of which will become a member of the audit committee. The government mentioned that these seats will be given to “independent experts”.
The deal also imposes “extensive remuneration restrictions” for senior management of the company.
Future dividend payments from the airline group may also be waived as part of the requirements.
The government explained: “Lufthansa is committed to pursuing sustainability goals, including renewing its fleet.” However, no details on environmental conditions tied to the bailout were disclosed.
In France, state-backed loans worth $7.6 billion were awarded to Air France-KLM in April but the government requires the airline to reduce absolute carbon emissions by 50% by 2024 on its domestic network.
Lufthansa said its management and supervisory boards will “come together shortly” to adopt the resolutions of the deal, which will also be subject to shareholder and regulatory approval.