El Al May Be Nationalized in Revised Rescue Plan

Israeli government offers to buy shares in rights issue, which could leave it with a 61% stake

Yoram Gabison
Yoram Gabison
El Al employees take part in a protest asking for recovery plan for the cash-strapped airline that has been grounded due to the coronavirus disease, Jerusalem, May 10, 2020.
El Al employees take part in a protest asking for recovery plan for the cash-strapped airline that has been grounded due to the coronavirus disease, Jerusalem, May 10, 2020.Credit: Ronen Zvulun / REUTERS
Yoram Gabison
Yoram Gabison

Israel moved toward nationalizing El Al Airlines Sunday after the treasury withdrew an earlier offer to guarantee a $400 million loan to the troubled carrier and instead proposed a mix of state-backed loans and a share sale.

Under the new plan, presented to El Al by outgoing Finance Ministry Director General Shai Babad, the government would guarantee 75% of a loan of only $250 million, down from a previous offer to back 82.5% of a $400 million loan, El Al said in a statement Sunday.

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The airline would raise the rest of the money through a rights offering to shareholders, including the Borowitz family, which now controls the company. The government would guarantee to buy whatever stock existing shareholders decline to take. If none of them act, the state would buy the entire issue, giving it a controlling 61% stake.

The nationalization of Israel’s flag carrier would mark a stunning reversal of the government’s long-standing policy of privatizing government-owned companies. The Borowitz family acquired El Al, which had once been government owned, 15 years ago and today holds a 38% stake. Another 8% is owned by Pinchas (Pini) Ginsburg, and the rest is traded on the Tel Aviv Stock Exchange.

El Al shares have plunged as the airline was forced to suspend service in the face of the coronavirus lockdown and turned to a reluctant government for help. TASE trading was suspended Sunday due to a labor action. It last traded on Thursday at 66 agorot (19 cents), at a market cap of just 330 million shekels.

The rights offering would be priced at the average price of El Al shares in May, when they were trading higher.

Like the previous aid plan unveiled three weeks ago, the new government bailout program comes with conditions. They include cost cuts of $400 million a year that include axing 2,000 of the airline’s 6,500 staff, eliminating loss-making routes and selling as many as 10 of its jets. El Al would also have to sign new collective labor agreement with unions, some of which have been resistant.

El Al’s board could reject the terms, but it will be hard-pressed to do so in the absence of an alternative. On the positive side, the new government plan would leave the carrier financially stronger by reducing its debt relative to equity, lowering its financial costs and enable new investors with deeper pockets than the Borowitz family to eventually take control of the airline.

Sources said Tami Moses Borowitz, who heads the family, isn’t expected to oppose the plan. It would leave the family holding company, publicly traded Knafayim, with a 14.7% stake in El Al without having to risk more of its capital.

From the government’s perspective, the new rescue plan would prevent the complete collapse of Israel’s flag carrier, whose financial straits are now so deep that its auditors attached a “going concern” warning to its last financial report.

The Finance Ministry had long held tough on bailing out El Al, but sources said Prime Minister Benjamin Netanyahu had concluded that Israel needs a national airline and can’t be in a situation where its air traffic is entirely in the hands of foreign carriers.

The new aid plan addresses many of the problems the previous one didn’t, including the challenges El Al had been facing before the onset of the coronavirus pandemic.

El Al’s immediate problem under the previous plan had been the refusal of Israel Discount Bank, which was supposed to provide the $400 million loan, to give the government have collateral against the 82.5% share of the loan it was guaranteeing. The bank was also demanding an interest rate of between 5% and 6%, which would have been extremely difficult for the airline to pay.

Discount’s hard line reflected concerns that El Al’s management was not up to turning around the business at a time when it is carrying debts of $2 billion and is 95% leveraged. The bank was also doubtful about the rescue plan, as were many in the treasury, which had stepped up its demand for annual cost saving over the course of negotiations with the airline.

The rights offering will allow El Al to borrow less, and at a lower interest rate. It will give the company a striking bargaining position versus Discount or any other bank that offers to lend it the $250 million.

The new plan is less favorable to the controlling shareholders, but treasury officials view that as a plus. Moses Borowitz had been managing the company behind the scenes poorly, officials said, which had left El Al in a financially weak position as the coronavirus struck. They said the airline might have sought protection from creditors even if there had been no pandemic.

In addition, the original plan would have risked Israeli taxpayers’ money if the rescue plan failed and El Al couldn’t repay the loan while leaving the company in the hands of its controlling shareholders if it recovered.

Moses Borowitz never publicly consented to one of the key conditions of the original plan, namely that shareholders inject 100 million shekels of new capital into the airline, of which Knafayim would have had to contribute 38 million. Knafayim bondholders had already made it clear they would not consent to the company’s contributing its share.

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