TAP - Take Another Plan

I have no doubt about TAP being a strategic company (even though the State, or Dr. Costa e Silva, has not yet defined the strategic sectors to support!). Nor does it interest me, for this analysis, that the financial performance of TAP was already deficient before the health crisis.

I begin by enunciating a patent declaration of interests: I was a partner at a law firm that advised David Neelman in the privatization process of TAP, although I did not participate in the transaction, and I was a lawyer for many years with the Barraqueiro group. Currently, I am no longer a partner of that law firm and I am exclusively exercising functions as a manager of a business group in the energy field.

Such a declaration of interests does not prevent me from giving my opinion on the most recent facts of TAP's soap opera.

I have always publicly defended that it was up to the State, in this health and economic crisis, to help companies financially and thus keep their jobs. And preferably via equity or quasi-equity instruments (ancillary or supplementary capital installments).

And I have always maintained that this aid should not be exclusive to small and medium-sized companies, nor should it be restricted only to those that were financially healthy before the referred crisis. Large companies, and especially “strategic” ones, and all companies that prove to be economically viable, although financially in distress (and even before the emergence of the pandemic crisis) should deserve support for their capitalization, promoting the creation of wealth (so necessary for the propagated tax redistribution) and job maintenance (vital for public savings through avoided unemployment funds and for the economy as a result of the much desired consumption).

That said, I have no doubts about TAP being a strategic company (although the State, or Dr. Costa e Silva, has not yet defined the strategic sectors to support!). Nor does it interest me, for this analysis, that the financial performance of TAP was already deficient before the health crisis.

It goes without saying that a shareholder cannot, should not, publicly, or in the European commission, in the direction of competition, announce that the company was not viable or that it was no longer viable before the pandemic crisis. But these are other ideological rosaries that, in fact, only hurt TAP and indirectly the State. If not, let's see: Luftansa received State aid of 9 billion euros and will compete in the future with TAP, which will have aid conditioned to a strong restructuring plan. If this is not a distortion of competition, I don't know what it is and it cannot be justified by the fact that TAP's pre-Covid underperformed. As they say in football slang: it's eleven against eleven and Germany wins in the end!

The State's intervention, through the purchase of 22,5% from the shareholder David Neelman for 55M €, maintaining the bond loan of a related party in the amount of 90M € was, according to TAP's Enterprise Value, disastrous.

The aid method is that it should have followed the following plan:

1. TAP is in a situation of insolvency or pre-insolvency, not guilty, since, for facts not attributable to the management of TAP, it is on the verge of not being able to fulfill its short-term obligations;

2. This circumstance would be sufficient for the State shareholder to demand from TAP's management a plan for recapitalization or restructuring of the company, which would always involve an increase in equity, since it does not seem to me that putting more debt in an already deficient balance sheet would help the future solvency of the company;

3. As one of the private shareholders - David Neelman - did not accept any of the conditions, the solution would be, without breaking the continuity of operations, to initiate a Spatial Revitalization Process (PER);

4. Private shareholders, in the face of this insolvency scenario, would be obliged by creditors (to whom the control of the company passes in an insolvency proceeding) to, in the limit, convert their credits into capital or to have their shareholder credits reduced to the most tiny expression (haircut).

5. Now, in any insolvency proceedings, if creditors saw that there was a shareholder willing to invest 1,2 billion euros and convert their subordinated credits into capital, they would be available for a restructuring of their credits, either through a haircut, either by a moratorium or by adapting the maturity terms to the real future cash flow forecasts.

6. And an insolvency process, accompanied by a restructuring plan to reinforce equity capital, reduction of routes and planes and necessary reduction in the number and benefits of workers, does not cause any interruption of the company's activity.

7. Nationalizing TAP would thus be a colossal legal mistake!

8. As far as I know of notorious facts, there is a contractual clause that grants Mr. Neelman the recovery of his credits in case of nationalization;

9. In a nationalization, all creditors remain unchanged, including Azul's bond loan!

10. The direct acquisition of the participation of Mr. David Neelman outside of a PER, allowed a fitting to Mr. David Neelman much higher than that he would receive in a PER or in any market transaction. Referring now to the fit that he would receive in a pre-covid transaction by Luftansa is just throwing sand in the eyes ...

The operation to acquire Mr. Neelman's stake by the State, for a value in line with TAP's enterprise value (close to zero) would be the most peaceful solution, maintaining private management, with greater supervision by the majority shareholder. But this operation would always have to be conducted, in the negotiations between shareholders, without ideological pruritus, through insolvency and a restructuring plan along the lines mentioned above.

Note that the restructuring plan would be approved by the creditors, which would always be easier to be accepted by the unions and their representatives!

One last word to acknowledge that it is always important to maintain decision-making centers in Portugal and, as Marques Mendes said, it is to be commended the patriotism and love for business risk of Mr. Humberto Pedrosa who, believing in the company and its workers, accepted to keep to become a shareholder and renounce a fit that no aviation entrepreneur could even imagine in this phase of complete paralysis of the sector!

I sincerely hope that this private shareholder will have an active voice in the management of the company, avoiding some dangerous tics in the public management of companies that operate in private markets.

Nationalization would be expensive and there was no need! This plan to acquire a private shareholder cost a lot of money and there was no need! You should take another plan!


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