SAA Airbus renegotiation rejected
The original plan had been to purchase 20 A320s from Airbus, the first ten of which were delivered earlier this year. Following the delivery of these ten, negotiations were entered into which saw the remaining ten A320s being cancelled, and SAA entering into a lease agreement with Airbus. On 16 November 2015, SAA sought approval from the Minister to amend the structure of the swap transaction.
“The transaction proposed entailed SAA purchasing the A330 aircraft and entering into a sale and leaseback of the aircraft with a local lessor so that the lease would be denominated in ZAR (the lease with Airbus would have been denominated in USD),” explained the Treasury.
The proposed new deal
According to Treasury, both SAA and Treasury noted the benefits of entering into a South African Rands deal as opposed to one conducted in US Dollars.
“However, SAA has confirmed that it still has to go on a Request for Proposals (RFP) process to identify a leasing company and perform due diligence procedures on the prospective lessor and hence the lease rates were still speculative. This applied to all terms and conditions including maintenance reserve payments, insurance requirements, return conditions, cross default clauses, any penalties including Buyer Furnished equipment (BFE) that may be incurred, other costs and expenses that would be payable etc. There was a risk that once finalised, the terms may prove to be more onerous than assumed by SAA in the submission,” highlighted Treasury.
A further concern to Treasury was that the leasing company would be expected to pay the $ 100 million that is owed to Airbus in pre-delivery payments, which are due by 21 December 2015. Due to the urgent need to finalise a transaction and the fact that no lessors had yet been identified, SAA would be required to make the immediate payments when they become due.
However, SAA and Treasury are in agreement that the airline is not in a position to afford to make the pre-delivery payments.
“Should the airline not have sufficient funds available to meet the PDP payments as they became due and payable and SAA defaulted on its obligations, cross-defaults would be triggered on SAA's guaranteed debt obligations as well as other leasing arrangements. A default by SAA would have severe negative consequences for SAA and could have spill over consequences for the country as a whole. Specifically it would negatively impact on government’s capacity to deliver on its social and developmental objectives,” noted Treasury.
Due to the above concerns, Treasury concluded that “National Treasury concluded that SAA had not demonstrated that there was certainty that the proposed amendment to the transaction structure would leave the airline in a better financial position than it would otherwise have been had the airline implemented the original swap transaction structure.
“In fact, the information indicated that the proposed transaction structure would actually leave SAA in a materially worse off financial position where it is unable to meet its commitments as they fall due. Although possible benefits may be realised through allowing the airline to continue to pursue an alternative transaction these were far outweighed by the high probability of a default on the government guarantees and the severe consequences thereof.”
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