Earlier we reported that Italy’s national carrier, Alitalia, did what many expected it to do after last week’s rescue plan, which would have cut 1,700 jobs and slashed pay, failed and filed for bankruptcy. What was less expected is that just hours after filing, the Italian government approved the bankruptcy process following a short cabinet meeting, an outcome that will lead to either Alitalia’s sale or liquidation, raising the possibility that Alitalia it will follow in the path of KLM and Iberia in ending a storied history as one of Europe’s major standalone airlines.
Why the speedy decision to grant administration proceedings caught many investors, and certainly bondholders by surprise, is that as we noted earlier, the carrier is losing about €1 million ($1.1 million) a day and without government support risks running out of cash by the middle of May. The government has already thrown it a short-term lifeline, a bridging loan of up to 600 million euros to see it through the bankruptcy process. Absent a sale – which looks highly unlikely – or a nationalization, up to 12,000 workers are likely to lose their jobs, potentially resulting in another major shock to the Italian economy.
This is precisely the scenario that the Italian Economic Development minister warned about last Sunday: “A [sudden closure] would be a shock for GDP much greater than the scenario that we are looking at: a brief period of six months covered by a bridging loan from the government so as to find a buyer who could provide services that Italians need as travelers,” he said in an interview with Sky TG24 television.
On the other hand, outraged at repeated bailouts that have cost taxpayers more than 7 billion euros over a decade, many Italians are urging the government to resist the political temptation to rush to its rescue again. They got their wish, if only for now.
As the FT reports, the centre-left Italian government — led by prime minister Paolo Gentiloni — said it would provide the carrier a €600m bridge loan that will allow the airline to operate for about six months or longer, likely until just after next year’s Italian elections. Carlo Calenda, economic development minister, said the €600m was the “maximum” the government could afford. He said administrators would be tasked with being “open to potential acquirers” and to “guarantee services, routes and personnel” while ensuring the government spend the least amount of public money possible.
Once the bridge loan runs out, unless a willing buyer has emerged, a liquidation becomes an all too real option.
Still, the government may change its mind: Gentiloni’s government has so far ruled out nationalising the airline and returning it to state control, amid polls showing that Italians would rather let it collapse. The terms of such a government loan have already been the subject of informal talks with the EU competition authorities, which would have to make sure it does not violate Brussels’ rules on state aid.
Of course, his predecessor Matteo Renzi also said Italy would never bail out Monte Paschi… until it did last December.
Some more perspective on the company’s fall from grace courtesy of FT:
The decision to enter administration proceedings caps a sharp reversal in Alitalia’s fortunes since the summer of 2014, when Etihad took a 49 per cent stake in the Italian airline as part of its drive towards global expansion. But since then, it has been hobbled by its high cost base and rising competition from low-cost rivals in the European market, especially Ryanair.
Alitalia adopted an aggressive restructuring plan in March, which was negotiated with trade unions, but it was rejected by the airline’s nearly 12,000 employees in a vote last month. This meant that the airline’s main investors, including Italian banks UniCredit and Intesa Sanpaolo, could no longer commit to a €2bn financing package to give Alitalia another lease of life.
Ultimately, Italy may have no choice but to bail out yet another insolvent company. Despite polls showing most Italians would favour a folding of Alitalia, rather than any new bailout, “the sight of several thousand workers in key hubs such as Rome and Milan being laid off could be problematic for Mr Gentiloni’s government.”
The matter has quickly risen to the top of the political agenda with Matteo Renzi. The former prime minister, who was re-elected on Sunday to the helm of the ruling Democratic party, has vowed to come up with a plan to keep Alitalia afloat by the middle of the month.
Yet while the final fate of Alitalia remains to be decided, bondholders aren’t sticking around for the answer, and after trading north of par in November, expecting that this outcome would never materialize, the bonds have since crashed into the teens, suggesting what is left of the company has liquidation value at best.
via http://ift.tt/2oUzTjp Tyler Durden