06 April, 2021

New capital-strengthening measures for Air France - KLM


                       The Air France-KLM group has confirmed the European Commission has approved a bail-out from the French government to the tune of €4 billion in order to recapitalise Air France and the group as it battles huge debts and a choppy future following the coronavirus crisis. 

Key parts of this rescue package include a capital increase for an amount up to €1 billion, a conversion of the €3 billion French State direct loan drawn into perpetual hybrid bonds instrument - which many see in other words as a loan that never really has to be paid back. 
The Dutch State is continuing discussions with the European Commission regarding potential capital-strengthening measures for the KLM / Dutch side of the group. Additional measures to further strengthen the Group’s capital are currently under consideration the group says and these will be advised at or before the 2022 Annual General Meeting.

T groups Board of Directors approved a plan to recapitalise:  
Capital increase with priority subscription period for shareholders
Launch a capital increase subject to market conditions, this offering will be composed of a private placement to institutional investors, a public offering and a priority period allowing all shareholders to support this transaction.
The French State commits to participate in the capital increase while keeping its stake strictly below 30% of the share capital and voting rights.
Buy more of China Eastern Airlines shares while keeping its stake strictly below 10%.

The Dutch State and Delta will not subscribe to this capital increase.

Simultaneously, the fully drawn conversion of €3 billion French State loan into perpetual hybrid bonds instrument (“Super Subordinated Notes”):

    The €3 billion direct loan provided by the French State to Air France via Air France-KLM late in May 2020 will be converted into Super-Subordinated Notes of the same nominal amount to Air France via Air France-KLM, allowing the Group to restore part of its equity under IFRS accounting standards.
    This operation will improve the Group’s equity by €3 billion under IFRS accounting standards with no cash impact, while increasing the Group’s flexibility in its mandatory debt redemption profile spread over time (with Non Call period ranging from 4 to 6 years). 

The Dutch State approved this set of actions and indicated  that it was continuing discussions with the European Commission on potential capital- strengthening measures for KLM.

Together with the expected recovery in EBITDA, this first step of capital-strengthening measures will progressively help the Group to reduce the Net Debt/EBITDA ratio below 3.0x by 2023.

Additional measures to further strengthen the balance sheet are currently under consideration with several steps to be taken before the 2022 Annual General Meeting, as the Group’s net equity will remain negative after this first step.

These measures could include the issuances of appropriate amounts of new equity as well as proportionate quasi-equity instruments, subject to market conditions. The hybrid perpetual bond instruments fully subscribed by the French State and resulting from this first step recapitalization could be used to compensate in part, by way of netting, to future equity and or quasi-equity raisings by the Group.

The objective of such additional measures will be to further reinforce the Group’s equity situation and reduce its Net Debt/EBITDA ratio circa 2.0x by 2023. In order to achieve this,  specific delegations would be then required and submitted at the Group’s next General Meeting, scheduled on May 26.

Additionally, the French state-backed loan (Pret Garantie d’Etat “PGE”) of €4 billion has been extended with a final maturity date in 2023. The Dutch State-backed loan guaranteed loan of €2.4 billion has a maturity date in 2025. These elements enable smoothen the debt redemption profile of the group and the airlines a smooth extension of the debt maturity profile of the Group.

Commitments made in order to comply with the European Commission’s “Temporary Framework for State aid measures to support the economy in the current Covid-19 outbreak” (TF).

Air France-KLM will be subject to commitments made by the French government in order to comply with the European Commission’s “Temporary Framework for State aid measures to support the economy in the current Covid-19 outbreak” (TF).

These commitments, specifically paragraphs 60-61 and 71-78 of the TF,  include Air France’s release of up to 18 take-off and landing rights (slots) at Paris-Orly airport to a competing carrier in order to create or develop an existing base at that airport, provided that the competing carrier obtaining Air France’s slots bases its aircraft and crews at Paris-Orly airport, in compliance with national and EU labour laws. Other general commitments were made under the TF, including restrictions on acquisitions, share buy-backs dividend distributions and executive management’s remuneration. These commitments are applicable to the entire Group with the exception of KLM and its subsidiaries.

The Group has reiterated the economic, financial and environmental commitments made in the framework of the State loan and reflected in its transformation plan.  The Group therefore maintains an ambitious environmental roadmap to accelerate the Group's sustainable transition, in line with the objectives of the National Low Carbon Strategy (Stratรฉgie Nationale Bas Carbone “SNBC”).

“Today’s announcement demonstrates both the strong commitment of the French State and the renewed support of the Dutch State to help the Group weather this pandemic and this crisis,” said Anne-Marie Couderc, Chair of Air France-KLM Board of Directors. “The commitment of our long-standing partner China Eastern Airlines to participate in the forthcoming capital increase also highlights a resolute confidence in the strengths and prospects of the Air France-KLM Group.”

“These first recapitalization measures are an important milestone for our Group in this exceptionally challenging period,” said Air France-KLM Group CEO, Benjamin Smith. “They will provide Air France-KLM with greater stability to move forward when recovery starts, as large-scale vaccination progresses around the world and borders reopen. Ensuring Air France-KLM maintains a sustainable financial trajectory is paramount to realizing our strategic plan, continuing the execution of our transformation plans at the Group and at our airlines. I would like to thank our employees for their engagement and their responsibility throughout this crisis. We will continue to work together to drive new efficiencies as we seek to lower unit costs and emerge stronger when the industry rebounds with the ambition to achieve European leadership”. 

Outlook for Q1

As expected, the Air France - KLM Group continued to be negatively impacted by the COVID crisis during the first quarter of 2021, notably by the surge of a third wave of the pandemic in several European countries and by the continuation of air travel restrictions taken by a significant number of countries.

Based on the accounting results of January and February and on the reforecast made at the end of each month, the Group expects the operating result for the first quarter of 2021 to be around EUR -1.3 billion, and EBITDA to be around EUR -750 million, below Q4 2020 EBITDA  as indicated at full year 2020 results presentation. It should be noted that in the first two months of 2021, operating result and EBITDA were significantly better than the Group's budgeted assumptions, and capital expenditure was also 10% below budget over that period, reflecting the effective control introduced by management on CAPEX, allowing the Group to have a solid 8.8 billion euros of liquidity and credit lines at disposal at 28 February 2021.

Over the coming months, and in particular at the beginning of the summer, the Group still expects a significant recovery in demand, assuming the positive effects of the accelerated vaccination campaigns in several countries could trigger less stringent restrictions on passenger travel across those countries. 

In response,  KLM issued the following statement. 


This is a very important step for the Air France-KLM Group and Air France. After the support in 2020 from the French state to Air France and the Dutch state to KLM, this further strengthens the financial basis of the Group. This is necessary given the enormous negative impact of COVID-19 on aviation.

For the Netherlands, the connection with the rest of the world via Schiphol is of strategic importance. That is why, in 2020, the Dutch State supported KLM with a loan of EUR 1.0 billion and EUR 2.4 billion in guarantees on credit facilities, linked to major conditions. KLM is grateful to the Dutch government for its support.

In time, KLM will also need capital. For that purpose the Dutch State is in talks with Brussels, Air France-KLM, KLM and other stakeholders.
As long as these discussions are ongoing, KLM will not comment on the progress of these talks.

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