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Say Yes (to the world): LHAGR update

26 May 2020 by jbchevrel

Deutsche Lufthansa AG (LHAGR) 5y CDS is the best performing single-name in the iTraxx Main today, tighter by more than -30bp. the CDS closes at around 370bp, vs a previous wide of 460bp (on a close-to-close basis) and a pre-COVID level (2/21) of around 60bp. this squeeze tighter comes after we got hit by the news that Germany will offer LHAGR a €9b bailout. This is the biggest corporate rescue in Germany, covid-to-date. The state will also back a 3y loan of €3b.This aid package implicates that the German State will take an initial 20% stake in LHAGR equity, which could rise to 25% + 1 share (blocking minority) in the event of a takeover. The plan requires EU approval. MOF Scholz said the German state’s investment would be temporary, but he also stressed that the timing of an exit would depend on the pace of LHAGR recovery. The German government has set up a €100b fund to buy stakes in distressed companies as part of its effort to stabilize the economy. The German government will pay €300m for new LHAGR stock at a discount €2.56/sh., which is the nominal value of LHAGR shares on its balance sheet. The deal also includes a €5.7b investment via a silent participation, a debt-equity hybrid instrument that wouldn’t dilute shareholder voting rights. LHAGR will pay a guaranteed dividend on the investment of 4% in 2020 and 2021, rising to 9.5% in 2027. A portion of the hybrid can be turned into 5% LHAGR equity if they do not pay the guaranteed dividend. The official timeline is that the German government aims to sell its stake in LHAGR by the end of 2023, although it depends on LHAGR capacity to repay LHAGR share price level.