EFTA Surveillance Authority

Registry

Rue Belliard/Belliardstraat 35

1040 Bruxelles/Brussel

BELGIQUE/BELGIË

(1)

In late October 2012, the Authority and the European Commission (“the Commission”) were informally contacted by Norway, Denmark, and Sweden (jointly “the States”) in relation to their intention to participate in a new Revolving Credit Facility (“RCF”) in favour of Scandinavian Airlines (“SAS”). On 12 November 2012, the States decided to participate in the new RCF without however formally notifying the measure to the Authority.

(2)

On 5 February 2013, the Authority received a complaint from the European Low Fares Airline Association (“ELFAA”) against the participation of the States in the RCF. With a letter dated 18 February 2013, the Authority invited the Norwegian authorities to submit their comments on the complaint and on the allegations of unlawful State aid.

(3)

The Norwegian authorities replied with a letter dated 25 March 2013. They also provided additional information by way of a letter dated 6 June 2013.

(4)

For this procedure, the Authority, pursuant to Article 109(1) of the Agreement on the European Economic Area (“EEA Agreement”) in conjunction with Article 24 of the Agreement between the EFTA States on the Establishment of a Surveillance Authority and a Court of Justice, is competent to assess whether the provisions of the EEA Agreement have been complied with by Norway. On the other hand, the Commission is solely competent to assess whether the provisions of the Treaty on the Functioning of the European Union (“TFEU”) have been respected by Denmark and Sweden. Also, on the basis of Article 109(2) and Protocol 27 to the EEA Agreement, in order to ensure a uniform application throughout the EEA, the Authority and the Commission shall cooperate, exchange information and consult each other on surveillance policy issues and individual cases.

(5)

In the light of the above and given the parallel competence in the present case of the Authority and the Commission, the Authority will transmit the observations it receives from interested parties and the States to the Commission, unless the party providing such observations has raised a duly motivated objection to that transmission.

(6)

Between 2001 and 2011, the Scandinavian air transport market (encompassing Denmark, Sweden, Finland and Norway) reportedly grew by 126 % in ASK (1) terms. Almost all of the growth in the short-haul Scandinavian market came from low-cost carriers, in particular Norwegian Air Shuttle and Ryanair. Indeed, it is estimated that low-cost carriers generated 90 % of the growth in that period (2).

(7)

Despite the increase in the importance of low-cost carriers, the dominant player in the Scandinavian market is still SAS, with an estimated market share in 2011 of 35,6 %, far from the highs above 50 % enjoyed a decade ago. The market shares of Norwegian Air Shuttle and Ryanair reached 18,7 % and 6,8 % respectively in that year.

(8)

SAS is the flag carrier of the States, the largest airline in Scandinavia and the eighth largest airline in Europe. It is also a founding member of the Star Alliance. The airline group, which includes Scandinavian Airlines, Widerøe (3) and Blue1, is headquartered in Stockholm with its main European and intercontinental hub at Copenhagen Airport. In 2011, SAS carried 22,9 million passengers, achieving revenues of SEK 38 billion.

(9)

SAS is currently 50 % owned by the States: 21,4 % by Sweden, 14,3 % by Denmark, and 14,3 % by Norway. The main private shareholder is the Knut and Alice Wallenberg's foundation (“KAW”) (7,6 %), while the remaining shareholders own stakes of 1,5 % or less.

Table 1

Principal shareholders in SAS AB on 31 March 2012  (4)

(10)

The financial position of SAS has been weak for several years, with recurring losses since 2008 and a current S&P credit rating of CCC+, downgraded from B- in November 2012. These difficulties have been heightened by the market environment of high fuel costs and uncertain demand. As a result of its deteriorating financial position, SAS followed a substantial cost reduction program (“Core SAS”) in 2009/2010. In order to help to implement that program, SAS had to raise equity from its shareholders by way of two rights issues: (i) SEK 6 billion in April 2009; and (ii) SEK 5 billion in May 2010 (5).

(11)

As for other airlines globally, SAS has been reliant on external credit facilities to maintain a minimum level of liquidity. Since 20 December 2006, SAS has relied on an RCF that was due to expire in June 2013 (“the old RCF”). The old RCF amounted to EUR 366 million and was exclusively provided by a number of banks […]. It also included a number of financial covenants or conditions, like for instance […].

(12)

In December 2011, the management of SAS projected that the airline would […] as a result of the deterioration in its business performance. As a result, in early January 2012, SAS drew the old RCF in full […]. It afterwards entered into negotiations with the banks and reached an agreement for a covenant reset on 15 March 2012, which increased the cost of drawing the old RCF, tightened the drawdown conditions and required SAS to provide full and immediate repayment of the drawn amount. In addition, SAS had to provide the lenders with a Recapitalisation Plan that had to be endorsed by the board and the main shareholders, i.e. the States and KAW.

(13)

The Recapitalisation Plan was underpinned by the so-called 4 Excellence Next Generation (“4XNG”) business plan, based on a business review by […] in early 2012. The 4XNG business plan will, according to SAS, enable it to position itself as a financially self-sufficient airline. It foresees a number of financial targets that SAS has to meet in the financial year 2014/2015, namely an EBIT margin above 8 %, a financial preparedness ratio above 20 % and an equity ratio (equity/assets) in excess of 35 %. The plan is supposed to allow SAS to improve its EBT by approximately SEK 3 billion on an annual basis, while its implementation will require restructuring costs and one-off costs of approximately SEK 1,5 billion.

(14)

As a result of the revised international accounting standard concerning employee benefits (IAS 19) that will be applied by SAS as of November 2013, the SAS Group’s equity will be reduced when all unrecognized deviations from estimates and plan amendments will have to be recognized in full. In addition, the plan includes […] an asset disposal and financing plan, which totals approximately SEK 3 billion in potential net cash proceeds. The asset disposal includes (i) the sale of Widerøe, a subsidiary regional airline in Norway (6), (ii) the sale of […], (iii) the sale of […], (iv) the sale of airport-related real estate interests, (v) the outsourcing of ground handling, (vi) the sale of aircraft engines, (vii) the sale of […], (viii) the outsourcing of call centres, and (ix) the sale or secured financing of three Q400 aircraft.

(15)

Norway insists that the 4XNG plan is self-financing, which means that SAS would generate enough cash from operations and non-core disposals to fund the upfront cost of 4XNG. However, SAS was concerned about investor perception of a weak liquidity position of the airline brought on by the significant upfront costs of implementing 4XNG. SAS thus requested an extension of the old RCF together with a new RCF supported by the States and KAW. However, SAS argued that neither the extension of the old RCF nor the new RCF would be drawn.

(16)

The discussion on the new RCF started on 4 June 2012 (7). Initially, in line with the Recapitalisation Plan (see paragraph (11) above), the banks that were lenders of the old RCF required that the States provide another round of equity, e.g. a rights issue, since they were unwilling to support a new RCF on their own. However, the States rejected this idea.

(17)

After some negotiations, the banks accepted a new RCF that would be set up jointly with the States and KAW to be structured strictly on equal terms without subordination or disproportionate rights to security. It must be noted that the new RCF was initially targeted to be SEK [4-6 billion] in size, while only SEK [1-4 billion] of available security existed. On 22 October 2012, the size of the new RCF was finally reduced to SEK 3,5 billion (approximately EUR 400 million).

(18)

The new RCF is provided by the same banks that provided the old RCF (except one (8)) together with the States and KAW: 50 % of the new RCF is provided by the States in proportion to their shareholding in SAS, and the remaining 50 % is provided by the banks and KAW. The States and KAW participate in the new RCF on the same terms (fees, interest rates, covenants) as the banks.

(19)

The main characteristics of the new RCF are the following:

(20)

The terms of the new RCF were agreed upon on 25 October 2012. It was however subject to inter alia parliamentary approvals for each of the States and the signing of union agreements with flight deck and cabin crew.

(21)

The States submitted a report prepared by CITI dated 7 November 2012 (“the CITI report”) which sought to assess and evaluate whether a private investor in a situation as close as possible to that of the States may have entered into the new RCF on similar terms and conditions. Assuming a successful implementation of the 4XNG business plan in its base case, the CITI report concluded that the participation of the States to the new RCF would generate an internal rate of return (IRR) of [100-130 %], a cash-on-cash multiple of circa [4-9x], and an increase in equity value of close to [800- 1 200 %] (from November 2012 until March 2015). The CITI report concludes that the return required by the States is thus at least equal to that required by private investors in a similar position. However, the CITI report does not assess the probability of SAS successfully executing the “base case” of the 4XNG business plan, nor does it assess the impact of deviations from the “base case” such as, for example, a failure to monetise non-core assets.

(22)

SAS announced on 19 December 2012 that all the necessary conditions for the new RCF to enter into force – see paragraph (20) above – were in place, including parliamentary approval in the States. As of this date, the new RCF replaced the old RCF (9).

(23)

By letter of 6 June 2013, Norway explained that, as a result of the sale of 80 % of the shares of Widerøe (paragraph (14) above), the States and the lending banks had agreed with SAS to a modification of the terms and conditions of the new RCF. However, as of that date, the agreement had not been formally signed and therefore it seems that the modifications to the new RCF had not entered into force. These modifications include the following:

(24)

ELFAA is of the view that the measure fails to meet the market economy investor (“MEI”) test.

(25)

ELFAA argues that no private investor would be willing to continue financing SAS in view of the SAS Group's financial situation as well as of the rights issues in 2009 and 2010 which failed to make the airline viable. ELFAA moreover considers that the 4XNG business plan will fail to restore the SAS Group's viability. In this respect, ELFAA points to statements by the Norwegian Minister for Industry and Trade who admitted that, despite the capital injection in 2009 and 2010, “SAS's revenue evolved considerably less than planned” and that “the return on the Government's investment in SAS, during the period 2006 to date, has been negative. SAS has failed to meet the State's requirement”. (11) Norway's figures on return on investment (“ROI”) were significantly negative (-90,8 % for the period 2009-2012). ELFAA notes that the ROI figures of Denmark and Sweden are similarly negative.

(26)

ELFAA also argues that the new RCF does not meet the pari passu argument since the participating banks were under heavy political pressure to participate in the new RCF. These banks would thus not act in a comparable situation to that of the States. Moreover, ELFAA considers that KAW hardly qualifies as a typical private investor due to the charity-like purpose of the foundation.

(27)

As regards the CITI report, ELFAA notes that CITI did not conduct any independent evaluation of the 4XNG business plan and that it merely assumed that this business plan will be carried out in accordance with its conditions. Therefore, ELFAA argues that the over-optimistic working assumption that SAS Group's business plan is solid and will be carried out as expected is enough to render CITI's statement void of any evidentiary value.

(28)

As regards compatibility, ELFAA argues that the new RCF and the 4XNG business plan are in direct conflict with the essential conditions for the approval of State aid under the Authority’s Guidelines on aid for rescuing and restructuring firms in difficulty (“the R&R Guidelines”) (12), in particular as regards the “one time, last time” principle and the requirement for compensatory measures.

(29)

Finally, ELFAA also asserts that the grant of unlawful State aid may have also extended to the banks participating in the new RCF.

(30)

Norway claims that its participation in the new RCF is on market terms since it participates in it pari passu  (13) with the banks and KAW, thereby excluding the presence of State aid.

(31)

Norway firstly argues that the position of each of the participating banks cannot be determined globally, given that there exist marked differences as to the extent to which the banks have other exposures vis-à-vis SAS, which would render any direct comparison meaningless. In any event, Norway claims that the banks were less exposed than the States and consider that the banks had no actual exposure from the old RCF in the period in which the negotiations on the new RCF took place, given that SAS had not drawn on the old RCF since it had been fully repaid in March 2012.

(32)

Norway admits that no shareholder other than KAW was asked to participate in the new RCF due to the fragmented ownership structure of SAS. However, in its view, this means that these shareholders will not receive any benefit from SAS having access to the new RCF, apart from any potential gain in stock value. Norway considers that KAW fully qualifies as a private investor.

(33)

Norway considers the 4XNG business plan to be sufficiently robust and believes that there is strong evidence that SAS will be able, after completing the implementation of the plan, to generate return to shareholders at par with market levels and that it will not require further support from its core shareholders. It also argues that the sensitivity analyses of the 4XNG business plan confirm that SAS will achieve long-term viability even if the plan is not implemented in full.

(34)

Finally, Norway also considers that the risks and potential rewards of its participation in the new RCF have been carefully balanced and that sufficient safeguards have been put in place. It moreover explains that the CITI report (paragraph (21) above) confirms that their participation in the new RCF would be on market terms and will potentially generate an IRR of [100-130%].

(35)

Point 10 of the R&R Guidelines clarifies that a firm is, in principle and irrespective of its size, regarded as being in difficulty for the purposes of the R&R Guidelines in the following circumstances: (a) in the case of a limited liability company, where more than half of its registered capital has disappeared and more than one quarter of that capital has been lost over the preceding 12 months; (b) in the case of a company where at least some members have unlimited liability for the debt of the company, where more than half of its capital as shown in the company accounts has disappeared and more than one quarter of that capital has been lost over the preceding 12 months; (c) whatever the type of company concerned, where it fulfils the criteria under its domestic law for being the subject of collective insolvency proceedings.

(36)

In this respect, the Authority observes that the SAS Group’s financial position has been weak for several years and that its financial performance has deteriorated significantly in the period 2008-2012. In particular, it is clear from the annual reports of the airline that, from 2008 onwards, SAS has incurred substantial losses every year and has registered significant amounts of financial net debt.

Table 3

SAS Group's key financial data 2007-2012 (SEK million)  (14)

(37)

The financial difficulties of the airline reached a peak and apparently became unsustainable in 2012, when SAS presented the 4XNG business plan, perceived by the management of the airline as the “final call” for SAS. (15) In addition, in November 2012 the press reported the possibility of SAS going into bankruptcy. (16) Also, the CITI report indicates that, in the absence of a new RCF, the likely outcome would be the default of SAS. These elements suggest that, at least at that time, SAS fulfilled the criteria for being the subject of collective insolvency proceedings under its domestic law in the sense of point 10(c) of the R&R Guidelines. On the basis of the information available at this stage, the Authority cannot exclude that SAS would fulfil this criterion at least since November 2012 and could be deemed a firm in difficulty.

(38)

In any event, the Authority notes that, in accordance with point 11 of the R&R Guidelines, a firm may be considered to be in difficulty “where the usual signs of a firm being in difficulty are present, such as increasing losses, diminishing turnover, growing stock inventories, excess capacity, declining cash flow, mounting debt, rising interest charges and falling or nil net asset value”.

(39)

From Table 3 above, it appears that SAS had not only incurred continuous losses and significant amounts of financial debt since 2008, but also that its revenue was in decline from 2008 onwards. The negative EBT for the whole period 2008-2012 and cash flow figures (except for 2010) are also clear indicators of the difficulties SAS has been facing during this time. Also, two of the main indicators of profitability (return on equity and ROCE) show substantially negative values as well as the interest coverage ratio, which shows the incapacity of the airline to generate enough cash from its operations to meet its interest obligations.

(40)

In view of these indicators, and bearing in mind point 11 of the R&R Guidelines, the Authority is at this stage of the view that SAS was a firm in difficulty at the time the measure was provided to the airline. In this respect the Authority recalls that the fact that not every indicator in point 11 of the R&R Guidelines applies to SAS is irrelevant, since the R&R Guidelines contain a non-exhaustive list of typical symptoms of a situation of economic difficulty and not a cumulative list of criteria. (17)

(41)

Article 61(1) of the EEA Agreement reads:

“Save as otherwise provided in this Agreement, any aid granted by EC Member States, EFTA States or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Contracting Parties, be incompatible with the functioning of this Agreement.”

(42)

The concept of State aid thus applies to any advantage granted directly or indirectly, financed out of State resources, granted by the State itself or by any intermediary body acting by virtue of powers conferred on it.

(43)

To constitute State aid, a measure must stem from State resources and be imputable to the State. In principle, State resources are the resources of a Member State and of its public authorities as well as the resources of public undertakings on which the public authorities can exercise, directly or indirectly, a controlling influence.

(44)

In order to determine whether an economic advantage in favour of SAS within the meaning of Article 61(1) of the EEA Agreement was granted, and therefore whether this measure involves State aid, the Authority will assess whether the airline received an economic advantage which it would not have obtained under normal market conditions. To examine this question the Authority applies the MEI test. In such a case, SAS would be able to continue operating without having to face the consequences normally deriving from its poor financial results.

(45)

According to the MEI test, no State aid would be involved where, in similar circumstances, a private investor of a comparable size to the relevant bodies in the public sector, and operating in normal market conditions in a market economy, could have been prompted to provide the measures in question to the beneficiary. The Authority therefore has to assess whether a private investor would have entered into the transaction under assessment on the same terms. The attitude of the hypothetical private investor is that of a prudent investor whose goal of profit maximisation is tempered with caution about the level of risk acceptable for a given rate of return. In principle, a contribution from public funds does not involve State aid if it takes place at the same time as a significant capital contribution on the part of a private investor made in comparable circumstances and on comparable terms (pari passu).

(46)

Finally, the measures in question must distort or threaten to distort competition and be liable to affect trade between the Contracting Parties.

(47)

According to established case law, when the financial support granted by a Member State strengthens the position of an undertaking compared to other undertakings competing in intra-Union trade, then there is at least a potential effect on trade between Member States and on competition. (18) In keeping with the Court case law, the Authority is of the view that any potential economic advantage granted to SAS through State resources would fulfil this condition, given that SAS is in competition with other airlines of the European Union and the EEA, in particular since the entry into force of the third stage of liberalisation of air transport (“third package”) on 1 January 1993 (19).

(48)

The Authority has assessed the presence of State aid in respect of the new RCF in 2012. It cannot be disputed that the measure entails State resources, since it is financed by resources coming from the States’ budgets, and that it would be imputable to the State, in particular since the parliament of Norway approved the participation of the Government in the new RCF (paragraph (22) above).

(49)

The only criterion of the notion of State aid that is thus in question is whether the measure conferred an undue economic advantage on SAS.

(50)

Norway claims that the participation of the States in the new RCF is on market terms since they participate in it pari passu with the banks and KAW. However, the Authority doubts at this stage that the pari passu argument holds as the States and the banks do not seem to be in comparable positions. The General Court has stated in this sense that “[…] la concomitance ne saurait à elle seule, même en présence d'investissements privés significatifs, être suffisante pour conclure à une absence d'aide au sens de l'article [107], paragraphe 1, [TFUE] sans prendre en considération les autres éléments pertinents de fait ou de droit” (20).

(51)

The banks have roughly halved their contribution to the new RCF (from EUR 366 million to approximately EUR 200 million) and have therefore reduced their overall present exposure to SAS by approximately 50 % in terms of the RCF. However, the States – which had no return as regards the 2009 and 2010 rights issues in view of the persistently negative results of SAS (paragraph (10) above) – have increased their exposure to SAS.

(52)

The Authority considers it likely that the banks may have carried out their own risk assessment before taking the decision to participate in the new RCF. However, contrary to the arguments of Norway, the Authority is of the view that the position of these banks must be seen in the context of the old RCF. That is, at the time of taking a decision to lend money to SAS through the new RCF, the banks had to compare whether it would be less risky to participate in the new RCF than to continue with the old RCF which was due to expire on June 2013 (paragraph (11) above).

(53)

The situation of the banks already participating in the old RCF can thus not be compared to that of other banks without participation in the old RCF but with an interest in taking part in the new RCF. As the CITI report underlines, a new lender without participation in the old RCF would require more stringent terms and conditions for the new RCF than those provided by the lending banks. In other words, the independent financial advisor of the States also considers that a new lender would not have participated afresh in the new RCF under the current terms. It therefore appears that a bank without previous exposure to SAS would not have offered the airline a similar deal.

(54)

In addition, the Authority notes that the banks participating in the old RCF should have taken into consideration the fact that SAS could have drawn from the old RCF until June 2013 if the new RCF had not been put into place. This would have meant for the banks an exposure of EUR 366 million (paragraph (11) above) and the risk that SAS may completely draw it, as it had actually done in January 2012 (paragraph (11) above).

(55)

In this respect, the Authority highlights the context in which the new RCF was negotiated and cannot exclude at this stage that the fact that SAS had drawn completely on the old RCF in January 2012 (paragraph (11) above) could have influenced the conduct of the lending banks to participate in the new RCF so as to ensure that the money that they had lent to SAS was not completely lost in view of the significant difficulties of the airline (section 1 above).

(56)

It is also unclear to the Authority whether the behaviour of the banks could have been influenced by the States' conduct. The Authority notes that the banks were willing to participate in the new RCF only on condition that the States participate in it as explained in paragraphs (15) and (16) above. In view of the continuous financial support of the States to the airline throughout the last years (see for example the 2009 and 2010 rights issues), the Authority cannot exclude at this stage that the decision of the banks to participate in the new RCF was influenced by the conviction that the States would support SAS. Moreover, as the involvement of the States was a strict requirement for the private operators to participate in the new RCF, the Authority considers that the pari passu condition may not be applicable given that the participation of the public authorities could not be replicated – and in fact was not – by any private investor.

(57)

The Authority moreover questions whether the behaviour of KAW can be considered as a reference point to establish the conduct of a private investor. The General Court has stated in its judgment in Alitalia that “[a] capital contribution from public funds must therefore be regarded as satisfying the private investor test and not constituting State aid if, inter alia, it was made at the same time as a significant capital contribution on the part of a private investor made in comparable circumstances” (21). In other words, in order for the pari passu argument to be applicable, the private investor participating in a given operation must be guided by prospects of profitability of the investment and it must not have other interests. However, the Authority observes that KAW is already exposed to SAS not only through its shareholding but also via the bank SEB (in which it has a majority shareholding and apparently control). […]. According to information received from SAS, SEB's net credit card exposure to the airline as of late November 2012 was circa SEK […] million (22). Therefore, KAW's participation in the new RCF could be motivated not so much by prospects of profitability of the investment but by the perspective to avoid higher losses through its subsidiary SEB.

(58)

The Authority has also examined whether the participation of the States in the new RCF could be considered rational from a shareholder perspective and would fulfil the MEI test outside the pari passu line of reasoning.

(59)

In the first place, although the Authority cannot exclude at this stage with absolute certainty that the 4XNG business plan – which constitutes the basis for the lenders' participation in the new RCF – can be successfully implemented in its entirety, it however has doubts whether the said business plan relies on sufficiently robust assumptions and it is uncertain whether the sensitivity analyses carried out in the plan are not overly optimistic. This concerns inter alia the following drivers:

(60)

Also, as indicated in paragraph (14) above, the 4XNG business plan includes a number of asset disposals, with an estimated impact of SEK 3 billion, as well as several cost-reducing measures. In this respect, the Authority observes that, while some of these material cost reductions have already been achieved (27), it is not clear whether a completely successful implementation of the 4XNG business plan could have been conclusively predicted at the time of signing the new RCF. For instance, it appears that the divestment of the SAS Group's stake in Air Greenland – which as the States have explained has been on sale since at least the introduction of Core SAS – has not taken place (28).

(61)

In addition, the Authority has assessed the validity of the CITI report, which appears as a crucial element in the argumentation of the States that their participation in the new RCF complies with the MEI test. In addition to assessing generally whether the terms and conditions for the new RCF would be acceptable to a private investor in as close as possible a situation to that of the States, the CITI report also assesses the overall anticipated return on the States' participation in the new RCF over the period 8 November 2012 to 31 March 2015, taking into account their combined 50 % shareholding and the anticipated future growth in the equity value of SAS.

(62)

As regards the new RCF terms and conditions, the CITI report assesses the fees, the relatively stringent drawdown conditions and the number and type of financial covenants (albeit making some further recommendations regarding the latter) (29), and comes to the view that a private investor in a similar situation may have participated in the new RCF on similar terms.

(63)

Nevertheless, the Authority highlights – as acknowledged by the States – that CITI did not assess the 4XNG business plan nor perform a sensitivity analysis of the financial model, but merely relied on the information provided to them. Furthermore, the CITI report does not value the security of the new RCF (30). As noted in paragraph (23) above, the size of the new RCF will likely be materially reduced by the proceeds of the sale of 80 % of the Widerøe shares since these divested shares would no longer serve as security, and SAS will pledge […] as security to Facility A. However, it is unclear to the Authority precisely what the market value of the security for the remaining part of the new RCF would be and how the remaining Widerøe shares can be used as security in that regard.

(64)

Since the Authority does not have information showing any independent assessment of the adequacy of the underlying collateral of the new RCF from a private market investor perspective, it is not possible to conclude at this stage that the security package (when viewed together with the relevant drawdown conditions and financial covenants) would meet the conditions of the MEI test.

(65)

The CITI report performs a return analysis on the new RCF including the implied capital gain from the States' shareholding in SAS. The CITI report presents an annualised IRR for the States over a three-year investment horizon assuming full and successful implementation of the underlying “base case”, (31) ignoring any deviations from this scenario. Moreover, the CITI report focuses entirely on this one particular scenario without considering the impact of possible alternative scenarios with less favourable assumptions on the return analysis.

(66)

Generally, an IRR analysis should take into account a range of future scenarios, including default, and assign probabilities of occurring to each of the scenarios. The CITI report assigns a zero probability to the likelihood that SAS will default in the next three years. However, given that SAS is currently rated CCC+ by Standard & Poor's, this seems an underestimation of the risk. Rating agencies' data shows that CCC+ firms have an average one-year default probability of around 8-9%. Over a multi-year horizon, the default probability is higher.

(67)

The Authority also assessed the model accompanying the 4XNG business plan, which offers seven different scenarios for each of the base, downside and pessimistic cases (as indicated above, CITI did not assess this model and limited itself to the base case scenario). The IRR varies depending on the case and the scenario, with the IRR going down to around [80-110 %] in what is called the “downside case” or even showing a non-positive IRR in the “pessimistic case” (32).The “downside” case appears to be a variation on the “base case” and also seems a rather optimistic case given that the only difference vis-à-vis the “base case” is that it assumes an [60-100 %] implementation of the 4XNG cost initiatives. It should be added that the SAS Group's interim report for November 2012 – January 2013 (33) shows that the projections of financial ratios for end 2012 were overly optimistic, resulting in too high an IRR. Given that deviations from projections further in the future are even more likely, it is important that the IRR reflects this uncertainty.

(68)

On basis of the above, the Authority has doubts whether the 4XNG business plan is sufficiently sound to induce a private investor to participate in the RCF. The Authority recalls that the attitude of the hypothetical private investor is that of a prudent investor whose goal of profit maximisation is tempered with caution about the level of risk acceptable for a given rate of return.

(69)

Against this background, the Authority cannot conclude at this stage that the participation of the States in the new RCF is provided on market terms and therefore cannot exclude an undue advantage in favour of SAS.

(70)

The Authority is thus of the preliminary view at this stage that the new RCF entailed State aid for SAS.

(71)

As regards ELFAA's allegations that the RCF may have also entailed State aid to the banks participating in it (paragraph (29) above), the Authority does not have sufficient grounds to consider that these banks may have derived an undue advantage from their participation in the new RCF. The mere fact that the States decided to participate in the new RCF does not necessarily mean that there is an advantage to the other lenders, which in any event continue to be very much exposed to SAS. Taken to the extreme, ELFAA's line of reasoning would mean that, any time that State aid is provided to a given undertaking, the creditors of the beneficiary would also receive State aid due to the improvement in the financial position of the beneficiary.

(72)

The Authority therefore concludes at this stage that the measure did not entail State aid to the banks participating in the new RCF.

(73)

In relation to the modifications to the terms and conditions of the new RCF agreed between SAS, the States and the lending banks (paragraph (23) above), the Authority notes that, on the basis of the information provided by Norway, as of 6 June 2013 – the date when the information was provided to the Authority - the agreement had not been formally signed and therefore the modifications had not entered into force. In view of this, the Authority notes that in the investigation procedure it will examine how the amended terms and conditions of the new RCF impact on the assessment of the present RCF measure and whether or not they have to be considered as new aid.

(74)

According to Article 1(3) of Part I of Protocol 3 to the Surveillance and Court Agreement, new aid must be notified to the Authority, and cannot be put into effect before the Authority has taken a decision authorizing it (the standstill obligation).

(75)

Should the Authority conclude that State aid has been granted, there would be a breach of the standstill obligation, given that this aid has already been put into effect, whilst not having been notified to, nor approved by, the Authority.

(76)

In so far as the establishment of the RCF constitutes State aid within the meaning of Article 61(1) of the EEA Agreement, its compatibility must be assessed in the light of the exceptions laid down in paragraphs 2 and 3 of that Article.

(77)

According to the case-law of the Court of Justice, it is up to the Member State to invoke possible grounds of compatibility and to demonstrate that the conditions for such compatibility are met. (34) The Norwegian authorities consider that the measure does not constitute State aid and therefore have not provided any possible grounds for compatibility.

(78)

The Authority has nonetheless assessed whether any of the possible compatibility grounds listed in Article 61(2) and (3) of the EEA Agreement would prima facie be applicable to the measure concerned. The Authority considers at this stage that the exceptions laid down in Article 61(2) of the EEA Agreement are clearly not applicable and have not been invoked by the Norwegian authorities. The same conclusion would apply to the exception foreseen in Article 61(3) (d).

(79)

In view of the fact that SAS would seem to be a firm in difficulty within the meaning of the R&R Guidelines in late 2012 – i.e. at the time the RCF was implemented (see section 1 above), it does not appear at this stage that the exception relating to the development of certain areas or of certain sectors laid down in 61(3)(a) of the EEA Agreement could be applicable.

(80)

In view of the nature of the measure and of the difficulties of SAS, the only relevant criteria appear to be those concerning aid for rescuing and restructuring firms in difficulty under Article 61(3)(c) TFEU on the basis of the R&R Guidelines.

(81)

The Norwegian authorities have provided no arguments as to the possible compatibility of the measure as rescue and/or restructuring aid. In any event, the Authority notes that the conditions for rescue aid laid down in section 3.1 of the R&R Guidelines do not seem to be met. In relation to restructuring aid as defined in section 3.2, the Authority observes that the 4XNG business plan does not include any of the necessary elements for it to be considered a restructuring plan in the sense of the R&R Guidelines, in particular regarding own contribution and compensatory measures. What is more, while normally compensatory measures should lead to a reduction in the capacity or market presence of the aid beneficiary, it appears that SAS is expanding its activities and increasing the number of routes: in 2012, 38 new routes were launched and 45 more will be operated as from 2013 (35).

(82)

On the basis of the arguments above, the Authority has doubts whether the new RCF can be regarded as compatible with the EEA Agreement,