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The moment of truth for Aegean

The issue of cash flow and passenger traffic needed for the Αegean to cover expenses is the main focus of analysts' concerns. The company's management is expected to provide details on monthly liquidity needs and how much it can withstand the current economic downturn.

Aegean's management is expected to shed light today on the company's resilience and the prospect of receiving state aid during a teleconference with analysts and investors scheduled for the after the close of trade on the Athens Stock Exchange.

The issue of cash flow and passenger traffic needed for the airline to cover expenses is the main focus of analysts' concerns. The company's management is expected to provide details on monthly liquidity needs and how much it can withstand the current economic downturn.

Another important issue is fuel costs. Although the drastic reduction in flights leads to a sharp drop in fuel expenses, which account for about 23 percent of the group's total operating costs, it is doubtful whether the company will reap the benefits, as sources indicate that costs stemming from hedging contracts approach 100 million euros. The group hedges about 60 percent of annual fuel needs.

In a recent statement, ICAP lowered its credit rating on Aegean due to the costs arising from its hedging positions. Clarity on the group's liquidity is also expected on cash reserves that cannot be used, as they are tied to 200 million euro bond the company issued in 2019 to finance the purchase of new aircraft.

Three-quarters of the amount raised from the bond sale, ie up to 147.1 million euros, will go towards the downpayment of 30 new generation A320neo aircraft (including engines) purchased in 2018, with the option of 12 additional aircraft.

Aegean took delivery of the first two aircraft shortly before the pandemic broke out, while eight aircraft are scheduled to be delivered in 2022, ten in 2023, and the remaining ten aircraft in 2024. It is noted that the company cannot change the use of funds except by special a procedure which, if not followed, shall be deemed to have terminated the termination of the bond contract.

The company's management is expected to provide more details about the agreement with Airbus and aircraft rental companies which, based on special agreements, are purchased by Airbus and then leased to Aegean. The airline is holding crucial negotiations with Airbus and lessors to change the terms of the deal on the new aircraft to postpone payments and receipts.

Difficulties with clinching state aid

Although European states are intervening, one after the other, with the tolerance of the European Commission's General Directorate of Competition due to the coronavirus crisis, to strengthen the airlines important to each country, the possibility of the Greek state supporting Aegean has a high degree of difficulty, according to lawyers familiar with European competition law.

A classic type of recapitalization, where the state provides funds and in exchange for shares, would require a large capital investment in the company, that would most probably lead to a change of control (nationalization). This, for obvious reasons, is ruled out by Aegean's management and shareholders, who would be hit hard. This is neither desirable for the government as the state would get caught up in the company amidst fresh memories of its involvement with Olympic airlines. A nationalization may also create problems with the bond loan, as a change in the control of the issuer may result in the termination of the loan agreement.

A solution that would not affect equity, ie a loan from the state, a common bond, or a contingent one that can be converted into shares (CoCo's), or even the issuance of preferred shares in favor of the state, would also have a high degree of difficulty. For any such solution to be accepted by DG Comp, it must be agreed that the state will receive the interest that a private creditor would receive, if it financed Aegean. Therefore, the airline would have to take on more debt which it may not be in a position to do, given uncertainty faced by the sector.

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