With the amendments prepared by the Ministry of Transport (MoT), supported by the government on Tuesday and adopted by the Saeima on Thursday, the Minister of Finance is authorized by a decision of the Cabinet of Ministers and a separate decision of the Saeima on consent to a specific transaction to carry out the purchase of fixed income securities of capital companies in which the state has a decisive influence, with a positive effect on the state budget in the long term.
The conditions of the state budget investment are determined by the state fiscal management regulations provided by the law, which until now did not allow the State Treasury to borrow to purchase long-term fixed income securities. Instead, these rules allowed only short-term transactions using free funds.
The Memorandum of Understanding explains that the amendments adopted by the Saeima give the state the opportunity to purchase bonds issued by state-controlled companies, which would significantly promote the capital market of Latvia. These changes will allow the state to be more actively involved as an investor not only in the financial sector, but also in strategically important companies.
By purchasing fixed income securities on equal terms with private investors in companies that are under the decisive influence of the state, the state will be able to promote a more attractive and competitive investment environment, informs the MoU. Such an approach will not only stabilize and strengthen these companies, but also create a positive environment for the development of the Latvian capital market, allowing the state to purchase fixed income securities on the same terms as other investors.
The law clarifies the authority of the Minister of Finance to use borrowed funds from the state budget for the purchase of securities of capital companies in which the state has a decisive influence, if this is done for the realization of the long-term stabilization reserve.
The scope of the law has been clarified, determining that the state can carry out transactions for the purchase of fixed income securities issued by capital companies under the decisive influence of the state with a positive effect on the state budget in the long term, subject to the conditions of commercial activity support.
The MoU explains that the European Union (EU) business support conditions allow such investments, subject to certain rules, which will have to be evaluated each time before the investment is made. According to EU court practice, any economic transactions carried out by the state do not confer an advantage on the recipient if they are carried out under normal market conditions.
Depending on the specific situation, normal market conditions are observed if they are carried out alongside the investment of private investors, or if they are carried out according to market conditions confirmed by the evaluation of equivalent transactions. If the transaction is carried out under “pari passu” conditions, it provides direct evidence of compliance with market conditions.
The MoU also states that by investing together with internationally recognized investors, the country not only unites with respected partners, but also strengthens its commitment to promote stable investment opportunities in the national economy.
As reported, on Tuesday, in the closed part of the session, the government considered the informative report submitted to the MoU “On the progress of the refinancing process of the bonds of “Air Baltic Corporation”. This report has a restricted access status and is not publicly available.
Minister of Transport Kaspars Briškens (P) said at a press conference on Tuesday after the meeting of the Cabinet of Ministers that the above-mentioned amendments to the “Law on Budget and Financial Management” will enable the state to participate in the bond of the Latvian national airline “airBaltic” at the same time and under the same conditions as international private investors. in the issue.
He previously stated that at the government meeting on Tuesday, airBaltic reported on the current status of the bond refinancing process, in which airBaltic also offered the government the opportunity to participate in the bond issue alongside international private investors.
The minister emphasized that in this case the state is offered the opportunity to assess whether the state also wants to participate in this bond issue on similar conditions with the same interest rate that would be fixed.
“It is clear that in the current conditions, this type of issuance has certain challenges, because both the financial and geopolitical situation, as well as the base interest rates have changed, so “airBaltic” works in close cooperation with its consultants and with investment banks in order to find in this issuance process the best solution,” says the minister.
Thus, Latvia can potentially use this situation to participate symmetrically with “airBaltic” private investors in this issue.
The changes in the law directed by the Government and the Memorandum of Understanding and adopted in the final reading in the Saeima determine the right of the state to invest in state-controlled capital companies in this type of bond securities, which is also an important step for the state’s more active involvement in the development of the capital market, explained Briškens.
He expressed that the changes adopted in the parliament will certainly help Latvia as a country to be an even more active shareholder and will help the development of state-controlled capital companies – not only “airBaltic”, but also other companies that are currently involved in the capital market, including issuing bonds or debt securities.
Briškens pointed out that the refinancing of the bonds is also a prerequisite for the further issuance of shares – the initial public offering (IPO) process, as a result of which “airBaltic” would obtain additional funds for its further development.
On the other hand, Finance Minister Arvils Asheradens (JV) emphasized at the press conference on Tuesday that such purchase of state capital company bonds, which the state could make on the same terms as private investors, does not put pressure on the state budget deficit. At the same time, Asheraden pointed out that the purchase of such bonds can only be financed by borrowing, so this would increase the amount of borrowed money.
Asheraden added that the government is obliged to sell its capital shares in “airBaltic” by the end of 2024, therefore the airline is also being moved to the stock exchange.
It has already been reported that in July 2024, the maturity date of the 200 million euro bonds of the Latvian national airline “airBaltic” will expire, so the airline is looking for external financing to refinance the bonds, and the company also plans to attract additional financing in the amount of about 100 million euros.
“The airline plans not only to refinance 200 million euros, but also to attract an additional 100 million euros in order to improve the cash balance and facilitate the financing of further capital investments related to increasing the company’s capacity,” the airline’s 2023 annual report explains.
It also mentions that “airBaltic” has hired international investment banks and financial consultants and is simultaneously working on various refinancing options, including opportunities to raise funds in the public debt market and the private debt market.
The report also mentions that the airline has also started negotiations with shareholders, including the Latvian government, to explore their willingness to finance part of the new debt alongside private investors in accordance with market conditions.
The audited turnover of “airBaltic” last year was 664.289 million euros, which is 33.2% more than in 2022, and the company also made a profit of 33.852 million euros, in contrast to losses a year earlier.
The Latvian state owns 97.97% of “airBaltic” shares, while “Aircraft Leasing 1” owned by financial investor, Danish businessman Lars Tūsen – 2.03%.
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