Airlines, automakers at the forefront. And it has only just begun. EU waives rules banning state aid. Ryanair, which doesn’t need a bailout, is furious.
By Nick Corbishley, for WOLF STREET:
Governments around Europe have rolled out a dizzying array of measures, including loan programs, tax payment deferrals, and furlough schemes, to help companies, large and small, withstand the fallout of the Covid-19 lockdowns. Large companies have also benefited from massive central bank purchases of their corporate bonds, which has helped to keep their debt costs low. But for some companies, including many of Europe’s largest corporations, it’s not enough.
The UK government last week launched Project Birch, an initiative that will allow the UK treasury to offer “last resort” support to select firms in order to avoid bankruptcy-type restructurings, that could have severe repercussions for bondholders and stockholders. Those firms could include Tata-owned Jaguar Land Rover, which is currently in talks with the government to secure a loan of more than £1 billion.
“In exceptional circumstances, where a viable company has exhausted all options and its failure would disproportionately harm the economy, we may consider support on a ‘last resort’ basis,” said a Treasury spokeswoman, who reassuringly added: “As the British public would expect, we are putting in place sensible contingency planning and any such support would be on terms that protect the taxpayer.” Not exactly reassuring given the UK government’s recent record when it comes to contingency planning.
Across Europe, governments are following the same playbook. The EU has granted member countries unprecedented fiscal leeway to deal with the economic impact of the coronavirus, enabling governments to open the spending spigots, and wave aside EU budget rules and competition rules that were supposed to, but didn’t really, limit government borrowing and state assistance for national companies.
In France alone, the government has mobilized €450 billion of funds to mitigate the impact of the lockdown. That does not mean France has spent €450 billion, since roughly two-thirds of the amount are in the form of state-guaranteed loans. Those guarantees will only be needed if the companies that use them default on them. Nonetheless, the government still expects France’s public debt to reach 115% of GDP by the end of this year — almost double the 60% ceiling established in the EU’s Stability and Growth Pact.
So far, the biggest recipients of state aid in Europe are European airlines, some of which are still refusing to refund passengers for cancelled flights. Some airlines that don’t want government handouts, such as budget carrier Ryanair, have taken legal action against the airlines and governments involved in the bailouts.
Unlike most airlines, Ryanair has €4.1 billion in cash reserves. Its CEO Michael O’Leary is furious that his cash-flush airline will have to compete with airlines primed with bailout cash, including Italy’s Alitalia which has turned a profit only once since 1946.
This week, it looks as if it’s the car industry’s turn for a bailout bonanza, with the likes of Renault, Jaguar Land Rover and Fiat Chrysler expecting billions of euros in direct loans and state guarantees. Today, Macron announced an €8 billion plan to save the country’s car industry that includes government subsidies for car buyers and long-term investment in innovative tech, especially battery-electric vehicles.
Europe’s sprawling aerospace industry will apparently be next in line for government handouts. With so much splashing around, here’s a rundown (in descending order) of seven of Europe’s largest corporate bailouts to date:
Lufthansa, €9 billion. Germany — and Europe’s — biggest corporate rescue so far. In return for the €9 billion rescue package, the government has taken a 20% stake in the airline group, which includes brands such as Lufthansa, Austrian, Swiss, Brussels Airlines and Eurowings and whose market value is now just €4.5 billion. It also gets two seats on the company’s board.
The government says it intends to sell its stake by 2023. “When the company is afloat again, the state will sell its shares,” Finance Minister Olaf Scholz said, adding he hoped to do so with a small profit. Governments all over Europe, including Germany’s, made similar comments about the banks they bailed out in the wake of the global financial crisis, many of which to this day are still partly or majority state owned and continue to rack up losses.
Air France-KLM, €7.7 billion (and counting). It didn’t take long for the European Commission to sign off on the French government’s proposed €7.7 billion rescue of Groupe Air France-KLM, which includes a €4 billion state-backed bank loan and €3 billion in direct loans. “This €7 billion French guarantee and shareholder loan will provide Air France with the liquidity that it urgently needs to withstand the impact of the coronavirus outbreak,” Margrethe Vestager, the EU’s competition chief, said. Brussels also appears to have few qualms about the Dutch government’s plans to inject a further €2-4 billion into the country’s flagship airline group.
Fiat Chrysler, €5.6 billion. This deal, currently the biggest for a European carmaker, is still on standby. According to a Bloomberg report, Italian lender Intesa Sanpaolo SpA is nearing approval of the massive state-guaranteed loan facility. It would come in handy for the world’s eight largest automaker after it lost €1.7 billion in the first quarter following a 98% plunge in car sales. That comes on the heels of a net profit of 2.7 billion in 2019.
Renault, €5 billion. This bailout, like the FCA one, has not yet been signed and sealed. But given Renault has reached an agreement on the loan with its main banks, the French State already holds 15% of Renault’s stock and France’s finance minister has said that without a bailout Renault “could disappear,” it appears to be a done deal. But it will do little to solve the deepening marital strife the French car giant is having with its corporate partner, Nissan.
TUI, €3.55 billion. To weather the Covid-19-generated storms lashing the global tourism industry, Europe’s biggest holiday operator recently received a €1.8 billion loan commitment from German state-owned lender KfW. That’s on top of a €1.75 credit agreement agreed in March.
“The commitment of the KfW bridging loan is an important first step for TUI to successfully bridge the current exceptional situation,” said Chief Executive Fritz Joussen at the end of March. The company’s shares have almost doubled in the past two weeks on hopes that some of Europe’s summer tourist season can still be salvaged. They are still down 50% since the virus crisis began.
Alitalia, €3 billion. Italy’s flagship carrier is no stranger to government handouts, having already received €7 billion in state subsidies in the decade before it entered special administration in 2017. In early March, Italy’s government seized the opportunity provided by the Covid-19 disaster to fully re-nationalize the perennially troubled carrier. Since then, it has received €3 billion in fresh capital.
Adidas, €2.4 billion. The German sportswear maker initially agreed to take a €2.4 billion government-backed loan in April to cope with the closure of stores and the postponement of the Olympic Games and Euro soccer tournament, though it bristled at the idea of suspending dividend payments as a condition of the loan. It now wants to replace that loan with other financial options as soon as possible and is reportedly planning a multi-billion euro bond.
Geconomy, €1.7 billion. The German electronics supplier received a government-backed loan of €1.7 billion in April to cushion the impact of forced shop closures on its business.
It’s worth noting that four of the seven bailed out companies listed above are German. This is no great surprise. Germany has more fiscal firepower than any other European economy, and whenever a crisis arrives, its government is quick to use it to support the corporate sector. Berlin has already mobilized €750 billion in grants and loan guarantees to companies, both large and small. Other countries are now playing catch up, particularly when it comes to saving the really large companies. By Nick Corbishley, for WOLF STREET.