The FT has reported that:
Flybe mortgaged off the majority of its remaining assets to its shareholders last year, potentially complicating the UK government's efforts to provide a loan on commercial terms to the struggling UK airline.
Connect Airways – a consortium of Virgin Atlantic, Stobart Air and hedge fund Cyrus Capital – formally took over the regional airline last year, with the members of the consortium also providing loans to Flybe.
UK corporate filings show that Flybe received a loan from the three shareholders in February 2019 that required the airline to pledge assets such as buildings, equipment and intellectual property as collateral.
So, what Flybe is asking for from the UK government is a £100 million loan to an exceptionally vulnerable business that has no security to offer, and whose shareholders are not apparently willing to let go of their own security to avoid having to provide the support that might underpin the value fo the asset that they have already put on their balance sheets.
As business propositions go this is about as unattractive as they come. Almost no interest rate can compensate for the risk in this loan.
So what might the government do?
First it could say that Flybe's not a flyer on this basis. They need to pass the problem back to the companies that acquired it not very long ago.
Second, they need to say that if these companies want help with their investment then they have to give up their collateral to secure it, or offer their own guarantees in place of that collateral. The small business owner who has had to offer a guarantee for a business loan will be entirely familiar with that type of demand.
And third? They could nationalise the company, because they are being asked to take an equity risk. I have little doubt that the EU could be persuaded on grounds of maintaining infrastructure, just as no doubt it will be in the case of Northern Rail.
Fourth, they could let the company go. Of all the options this looks the most likely in this scenario. And anything else might look deeply irresponsible.
The ball is in the court of the current owners of Flybe. If they want a bail out they're going to have to pay for it. The price will be a loss of security.
The question they're being asked is a simple one when considering their options. It is do they value their backstop security more than any social obligation to keep an airline running when they bought it so recently?
To put it another way, what is being asked is whether there is corporate social responsibility in action?
Let's see.
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In other news, Huawei gets to build 5G due to market failure.
Good, as far as I know…
Given how recently they purchased it, surely due diligence would have given an indication of the health of the company? Was it bought to asset strip and if so, would there have been any indication that the taxpayer might end up bailing it out at the time (minus the assets)?
I think that a fair question
Another £100m on top of the tax holiday? Crumbs.
It was taken over about a year ago for £2.8m plus a funding commitment of £100m. Otherwise it might have gone bust. A year later it has charged its assets to the shareholders (what are its aircraft worth?) and needs another £100m to keep going. What do we think will happen next January?
This sort of thing – shareholders taking the assets as security for a shareholder loan, and letting the business go to the wall, with unsecured third party creditors losing out – sounds familiar from other distressed situations. Usually it is the bank that takes the assets but I guess they are so bad a risk that the bank won’t lend. Whereas the taxpayer may be a softer touch.
what are the assets? I would assume the fleet is leased as are the airport spaces, but could be wrong
does that leave the routes and the name?
Apparently the planes are all already used for security
As are the buildings
And may, even, the landing slots
That leaves not a lot left over
Some of the owners of Flybe have very deep pockets (notably a certain Mr Branson), and the government should say that if they want to keep it going they find the money to do so themselves.
One is always left with the impression of complete incompetence. Years pass, the underlying problems are clearly understood, “decisions” are left to the last moment, and then need to be modified or reviewed.
No doubt the planes are leased, but even so, the leases may have some inherent value (the right to use the aircraft for a period) depending on what premiums were paid or what rentals are due. And the right to use a slot almost certainly also has value, if it can be transferred.
But the main point, surely, is why should the government act as the lender of last resort, to a commercial business which has struggled for years, in a business sector which most people understand needs to contract anyway, with few signs are the business would be turned around and the money would be repaid? £100m to keep 2000 employees in jobs for one more year? Just give them the £50k each and be done with it.