SAA pulled back from the brink

It came right down to the wire, but finance minister Pravin Gordhan appears to have won his battle against the chair of the SAA board having secured the Airbus swap deal and saving SAA from an estimated R1-billion in impairments.

Late on Monday night the National Treasury announced, through a statement, that the South African Airways board had approved the execution of a swap transaction with Airbus – in which a deal to purchase ten A320 aircraft will be swapped for a lease of five A330-300 aircraft – and that “a process is underway to conclude it within the next few days”.

This arrangement, Treasury said, will save the financially distressed SAA from an estimated R1-billion in impairments and will also result in $100-million cash refund for the national carrier.

There was a great deal of urgency to conclude this process, as the deadline extended by Airbus was Monday 21 December – by when either an new deal was approved, or pre-delivery payments of $40-billion to the aircraft manufacturer became due.

Treasury indicated that an extension has been granted. “Airbus has indicated that they are amenable to the implementation of the transaction and have required that all legal documentation be in place by 28 December 2015,” the statement said. “The National Treasury will work closely with Airbus and SAA to finalise the swap transaction.”

The timing of the shock removal of Nhlanhla Nene from his post as finance minister two weeks ago was widely speculated to have been linked to the 21 December Airbus deadline.

Nene and the SAA board chair Dudu Myeni failed to agree on the structure of the new transaction. Myeni has close ties to President Jacob Zuma, who two weeks ago unilaterally made the decision to remove Nene and replace him with parliamentary back-bencher David van Rooyen.

Markets quickly whipped into a frenzy and the rand plummeted sharply past R15 to the US Dollar. So severe was the reaction that, four days later, Zuma announced that Van Rooyen would no longer head up Treasury and instead would be replaced by the fiscally-frugal Pravin Gordhan.

Because of the looming deadline, Gordhan’s first matter at hand was addressing the structure of the new Airbus deal – and getting Myeni to sign off on it.

As Mail & Guardian reported last week SAA documents explained how, in 2017, the airline had been due to take delivery of ten A320 narrow-body aircraft from Airbus, part of a legacy contract dating back to 2002. SAA had to make payments to Airbus in advance of the delivery.

More than a decade later, the terms had become onerous. Price escalations meant SAA was being forced to buy the planes at higher than market rates, fast eroding its already weak balance sheet, according to other SAA documents.

As SAA ran out of cash this year, it could not afford to make the payments to Airbus, some of which were already overdue. And for every month it was overdue Airbus could set back the delivery date and charge interest. The contract was one of the key factors driving the airline to bankruptcy, sources had told the M&G.

In April this year the Board of SAA applied for approval from Nene to cancel the purchase of ten A320 aircraft and instead enter into an operating lease on five A330-300 aircraft with Airbus. During July 2015 he approved this request.

But in November, SAA applied for permission to amend the transaction to allow SAA to purchase the A330-300 aircraft and enter into a sale and lease back deal with one or many local lessors. SAA argued that one of the benefits of this transaction structure would be a mitigation of the airline’s exposure to exchange rate fluctuations.

On 3 December 2015 Nene rejected the fresh amendments to the swap transaction structure. “Whist acknowledging that SAA might have benefited from entering into the local leasing arrangement, Minister Nene highlighted that the terms of the local leasing transaction remained speculative and there was considerable risk that the local leasing arrangement would not be in place by the time the A330 purchase contract was concluded with Airbus, at which point SAA would be required to pay $100-million in pre-delivery payments,” Treasury explained.

It was likely that the airline would not have the cash resources available to make such a payment, resulting in it defaulting on its obligations, triggering cross-defaults on other leasing arrangements and SAA’s government guaranteed debt obligations, resulting in “severe negative consequences for SAA and for the country as a whole”, Treasury said.

Immediately after his appointment Gordhan gave SAA an opportunity to make further representation, following which he decided that the airline must go ahead with executing the A320/A330 swap as had been approved in July 2015.

“The implementation of the transaction will therefore improve the airline’s financial position by alleviating the cash flow pressure and improving its profitability,” Treasury said. “Further measures will be taken next year to stabilise the airline.”

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