May 25 - The German government and Lufthansa (LHAG.DE), which has been hit hard by the coronavirus pandemic, have reached a preliminary deal on a 9 billion euro (8 billion pounds) bailout.

 

The airline has been in talks with Berlin for weeks over aid to help it to cope with what is expected to be a protracted travel slump, but the carrier has been wrangling over how much control to yield in return for support.

 

The German Finance and Economy Ministries on Monday said Lufthansa was an operationally healthy company before the coronavirus outbreak, was profitable and had good prospects for the future but had got into trouble because of the pandemic.

 

Rivals such as Franco-Dutch group Air France-KLM (AIRF.PA) and U.S. carriers American Airlines (AAL.O), United Airlines (UAL.O) and Delta Air Lines (DAL.N) have also sought state aid.

 

Shares in the company were up 5.5% at 8.48 euros by 1507 GMT.

 

Lufthansa said that conditions of the deal include the waiver of future dividend payments and limits on management pay. The government will also fill two seats on the supervisory board, one of which is to become a member of the audit committee.

 

The plan includes Germany taking a 20% stake in Lufthansa, which it plans to sell by the end of 2023. Germany will buy the new shares at the nominal value of 2.56 euros apiece for a total of about 300 million euros.

 

Finance Minister Olaf Scholz said the rescue package was a “very, very good solution” that takes into account the needs of both the company and taxpayers.

 

“The support that we’re preparing here is for a limited period,” he said. “When the company is fit again, the state will sell its stake and hopefully … with a small profit that puts us into a position to finance the many, many requirements which we have to meet now, not only at this company.”

 

The government will also inject 5.7 billion euros in non-voting capital, dubbed silent participation, into the company. Part of this could be converted into an additional 5% equity stake, either if coupon payments are missed or to protect the company against a takeover.

 

The silent participation will carry a coupon of 4% in 2020 and 2021, increasing to 9.5% by 2027 to encourage fast repayment.

 

Separately, Lufthansa will receive a 3 billion euro loan from state-backed bank KfW and private banks with a term of three years.

 

The bailout deal is still pending approval by shareholders as well as the European Commission.

 

The company and the competition watchdog are still discussing which slots at which airports Lufthansa will have to waive as a remedy to ensure the bailout does not hamper competition, a person close to the matter said.

 

“Scrutiny is extremely thorough as it is the first large equity-based bailout in the pandemic,” the source said.

 

According to business daily Handelsblatt, German chancellor Angela Merkel said that Germany would fight for remedies not being too stringent.

 

 

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