We look at recent events and the potential evolution of Alitalia’s insolvency.
In light of its serious economic and financial situation, on 02 May 2017 the Italian national air carrier Alitalia - Società Aerea Italiana SpA (Alitalia) was made subject to the Extraordinary Administration procedure (Amministrazione straordinaria per le grandi imprese in stato di insolvenza) pursuant to the so called “Marzano law”.
Background: the collapse of Alitalia
Alitalia is a joint stock company, employing about 12,500 people and participated in by CAI - Compagnia Aerea Italiana for 51% and by Etihad for the remaining 49%. Following a considerable loss emerging from the 2016 results, the company approved a business plan providing, among other things, for a €2bn ($2.2bn) capital increase which was conditional upon the entering into of an agreement with trade unions providing for 980 redundancies and an 8% salary cut.
Unions and the company agreed upon the above plan, which the Unions submitted to the employees of Alitalia in the form of a referendum. The referendum was held and resulted, on 25 April 2017, in a rejection of the plan by the workers (67% of the voters were against the agreement).
As a consequence, the board promptly called for a formal shareholders’ meeting to resolve upon a recapitalisation through an increase in share capital.
The shareholders’ meeting was held on 02 May 2017 and, as expected, did not pass the proposal of an increase of share capital, as a consequence of the “no” vote on the plan by the Alitalia employees and of the logical impossibility to pursue the business plan.
Immediately after the shareholders’ meeting, a board meeting was held, acknowledging: (i) the impossibility of carrying out of the business plan and (ii) the impossibility of the continuation of the corporate business; therefore resolving to apply to the Ministry of Economic Development (Ministero dello Sviluppo Economico - or MISE) for the admission to the Extraordinary Administration procedure pursuant to Law Decree no. 347/2003 (so-called Marzano Law).
The company filed for the procedure on 02 May 2017. Alitalia also filed an application with the Court of Civitavecchia, to obtain an order acknowledging the situation of insolvency.
The Government issued on the same day a decree providing for the opening of the Extraordinary Administration (the Governmental Decree), and for the appointment of three administrators. Although the general content is known and the Governmental Decree is in force, it has not been published yet.
The Government also enacted on the same day a Law Decree (Law Decree no. 55/2017 published in the Official Gazette on 02 May 2017 - the “Law Decree”), providing for a €600m short term bridge loan to the company, with a maturity of six months, to deal with immediate liquidity needs during the procedure. The Law Decree provides that all claims arising from the loan will have super-priority, ie will rank ahead of any other creditors’ claims vis-à-vis Alitalia.
What is Extraordinary Administration?
Extraordinary Administration is an insolvency and protection procedure, conceived to provide a preservation of the business for large insolvent companies which maintain a significant business value.
Following the appointment of the administrators, a step plan must be submitted by the administrators to the MISE, for its approval.
The plan can provide for:
- the liquidation of the assets / business
- a financial and economic restructuring of the company, or
- for companies, such as Alitalia, carrying out a public service, a transfer of blocks of corporate assets and contracts, pursuant to a program for the continuation of the business.
Should MISE not approve the plan, the administration will be converted into an insolvency liquidation procedure.
Alternatively, the administrators may submit a settlement to its creditors (concordato), providing for classes of creditors and partial payments of claims.
What happens to creditors?
From the issue of the Governmental Decree, the situation of the existing debt, including bondholders claims, is frozen.
All individual enforcement actions against the company for preceding claims or contracts are prohibited.
Creditors must file an application with the Court, within specific deadlines, to have their existing claims acknowledged and participate in the distributions or payments that the procedure is able to effect during its life.
However, the impact on a given creditor’s rights and obligations should also be checked taking into account the specific type of agreement and provisions and the law governing the contractual relationship.
What happens to those who have a contract with Alitalia which is still totally or partially pending?
Pending contracts are not terminated by operation of law. The administrators may elect to terminate pending contracts (ie.contracts which have not been fulfilled or completed by the parties before the opening of the procedure). Pending contracts remain effective until the termination right is exercised by the extraordinary administrator.
After the approval of the step plan, the other party may request, by written notice, the extraordinary administrators to state formally whether they are going to terminate the pending contract or not. Unless a different intention is notified within 30 days from the receipt of the notice, the contract shall be considered terminated.
The aforementioned provisions do not apply to employment contracts and real estate leasing contracts where the lessor is subject to an extraordinary administration procedure. Therefore, the extraordinary administrators shall take over the contracts, unless a different agreement is reached.
Does claw-back apply to payments made / guarantees taken before the opening of the procedure?
Yes, the extraordinary administrators can commence claw back actions pursuant to the insolvency law provisions. The law also provides for a particular claw back action in relation to intragroup transactions, on significantly longer terms than the common one.
Given EU rules on State aids and on the current level of Italian Public Debt, recapitalization by the Italian State is very remote.
Nationalisation of the carrier cannot be ruled out, but it is not the most likely scenario. There is strong opposition by the Italian public opinion, which does not look favourably on any further burden on taxpayers, to rescue a company which has been losing money for 30 years.
According to declarations appearing in the press, the task of the Government seems to be a sale of the entire company’s business to an investor.
It is not easy to think of a potential investor, such as a competing airline or a consortium, taking over a company with such serious structural problems. It is doubtful that Alitalia’s only actual strongpoint (ie its serving a country which is one the most important tourism destinations in the world) will suffice to balance the significant financial and industrial efforts required to put the company “back in the black”.
At any rate, any sale to an investor will certainly require significant sacrifices, in terms of redundancies and downsizing of infrastructures, probably greater than those rejected by the employees’ votes.
The alternative, if no investor materializes, will inevitably be a liquidation, where the only assets with a real market value are likely to be aircraft (although it should be checked which portion of the fleet is actually owned rather than leased) and slots, with some real estate properties, mostly concentrated in the Rome area.
In a situation where the real equity value has to be carefully considered. The main company’s assets are some real estate properties, mostly concentrated in the Rome area, aircrafts and slots.
In this respect, it has to be noted that the Government, with the Law Decree, has fixed a deadline of six months for receiving offers from investors in the company. The bridge loan and the incoming summer season (when Alitalia has more chances to keep a positive EBITDA) should allow the company to survive for such a period of time. However, the recent events would suggest that the six month deadline will easily sound as the “last call” for the troubled airline.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.