Nene rules on SAA Airbus swap

Cape Town - Minister of Finance Nhanhla Nene has not approved the proposed amendment to SAA's Airbus A320/A330 swap transaction structure, National Treasury said on Thursday.

Nene has instructed SAA that it must implement the transaction structure in line with the approval that had already been granted. That would mean to conclude the agreement to swap the purchase of ten A320s for a lease of five A330s from Airbus.

According to Treasury SAA has not demonstrated that there was certainty that the proposed amendment to its Airbus A320/A330 swap 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.

Nene felt the available 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," Treasury said in a statement.

"Should SAA conclude a significant transaction with Airbus or any other party for which the airline has not received approval in terms of Section 54, this would constitute an act of financial misconduct, which could be grounds for sanctions against the board."

In 2002 SAA entered into a purchase agreement with Airbus to acquire A320 aircraft. The first ten of the 20 A320s had been delivered and the delivery of the remaining ten aircraft was
expected to take place by 2017.

The original contract for the acquisition of the A320 aircraft, however, resulted in the acquisition price negotiated with Airbus exceeding the current market value of the A320s due to the escalations that were part of the contract.

"To rectify this onerous contract, SAA had negotiated a swap transaction where the purchase of the remaining ten A320s would be cancelled and SAA would instead enter into operating leases
on five A330-300s. From an operational point of view, the A330-300s would be deployed to phase out the A340-600 wide body fleet, which was anticipated to result in cost savings," Treasury explained.

Nene gave final confirmation of this in September 2015. Subsequently, SAA chairperson Dudu Myeni informed Nene that the board was reviewing the transaction structure with a view to amending it. Nene made it clear that any such amendment should leave SAA in a better financial position than would otherwise have been the case had the swap transaction gone ahead.

In November 2015, SAA indeed asked Nene's approval to amend the structure of the original swap transaction that had been approved by him.

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 rand and not in dollar anymore. Because the nature of the transaction could have a material impact on SAA’s financial position, failure to conclude the transaction was preventing the finalisation of SAA’s 2014/15 financial statements.

In Treasury's review of the application, based on the indicative lease rates provided by SAA, both SAA and National Treasury’s assessment indicated that possible benefits may be realised through entering into rand lease.

"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," Treasury explained.

This applied to all terms and conditions including maintenance reserve payments, insurance requirements, return conditions, cross default clauses, any penalties, other costs and expenses that would be payable.

"There was a risk that, once finalised, the terms may prove to be more onerous than assumed by SAA in the submission," added Treasury.

"There was considerable risk that no such arrangement would be in place by the time that the contract with Airbus must be concluded. In the absence of having identified the financial institution that would act as the lessor, SAA would be required to make the immediate payments that would become due."

Treasury pointed out that SAA has acknowledged - and Treasury agrees - that it is not in a financial position to afford the pre-delivery payments (PDPs).

"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," said Treasury.

"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."


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