The company needed to be recapitalised and the State, as owner, was restricted in its ability to fund such investment. Offers were solicited for Malév and in early 2007 it was decided that a special purpose vehicle named AirBridge had made the most attractive offer. AirBridge offered an attractive and allegedly commercially viable business and restructuring plan.

1. (a)
   AirBridge bought 99,95 % of the shares in Malév for HUF 200 million (EUR 740 000). By 31 December 2008 at the latest, AirBridge was obliged to provide funding9 in the amount of EUR 50 million.
2. (b)

   A loan granted in 2003 to Malév by the 100 % state-owned Hungarian Development Bank (Magyar Fejlesztési Bank, hereinafter "MFB") amounting to EUR 76 million was taken off Malév's balance sheet and transferred to a 100 % State-owned special purpose vehicle Malév Asset Management Company (Malév Vagyonkezelő Kft., hereinafter "MAVA").

   This 2003 MFB loan was a EUR denominated, 100 % State guaranteed loan, with an interest rate of 3-month IBOR + 0,5 %. The original expiry of the loan was 2013, the principle to be repaid in one instalment at the end of the maturity. With the transfer of the principle and interest to MAVA, the loan's maturity was also extended until 2017.

   According to the Hungarian authorities, assets worth EUR 76 million were transferred to MAVA along with the loan. These assets comprised the Malév trademark, a kerosene pipeline and one B767 aircraft. Were Malév to be profitable, it would also have to pay 25 % of after tax profits to MAVA. AirBridge also provided a bank guarantee to MAVA from VEB to cover the reimbursement of the loan up to EUR 32 million.

3. (c)

   Malév would also pay MAVA the sum of EUR 200 000 per year as a license fee for the use of the name "Malév" and logo. AirBridge was obliged to keep using the brand name and to ensure the operation of the company as an airline until 31 December 2017, the new expiry date of the loan.

4. (d)
   Malév would lease back the B767 aircraft – just transferred to MAVA (see point b above) – from MAVA from 1 January 2008 to 31 December 201710.

A new management was appointed and a number of cost saving and revenue generating measures were put in place. These included the discontinuation of long haul operations and staff cuts. According to Hungary, however, as these measures coincided with a massive increase in fuel prices they had no overall effect on the company's profitability.

Malév's financial position continued to deteriorate and, after 4 months, it lacked the necessary liquidity to make royalty payments for the use of the Malév brand name.

According to Hungary, payments for the B767 aircraft leased from MAVA have not been "stopped" once Malév had decided to suspend long haul routes as Malév is "recognising" those debts and there is merely a delay in payment on which interest is paid.

In the second half of 2008, the global financial crisis began to impact on Malév as well as on its Russian partners. Several of Mr Abramovich's airlines went bankrupt. AirBridge found itself no longer able to finance Malév and defaulted on its loan reimbursement to VEB. As the 49 % shareholding in AirBridge was pledged to VEB, VEB took over those shares. VEB indicated that it was willing to continue to finance Malév, but as a bank not as an owner.

As previously stated, Malév's financial situation had further deteriorated in early 2009. Its shareholders therefore approached the State Holding Company (Magyar Nemzeti Vagyonkezelő Zrt., hereinafter "MNV") with the proposal to sell to MNV Malév Ground Handling, Malév's 100 % subsidiary (hereinafter: "Malév GH").

According to Hungary, Malév GH was at the time and continues to be a financially sound undertaking.

A preliminary purchase agreement was signed in January 2009 (and amended in February) providing for advance payments of HUF 4,3 billion (EUR 16 million). MNV made advance payments to Malév in January and February 2009. These advance payments were to be repaid within 2 working days if, after the due diligence, MNV decided not to proceed with the signing of the final sale and purchase agreement. This potential repayment obligation was secured by collateral agreements. In July 2009, MNV eventually decided to abort the transaction and the repayment of the purchase price became due.

Between January 2007 and March 2010, the Hungarian Tax and Financial Control Administration (Adó- és Pénzügyi Ellenőrzési Hivatal, hereinafter: "APEH") permitted Malév to defer or reschedule payments for different types of taxes and social security obligations. APEH failed to enforce the overdue debt as from July 2008 and even granted the rescheduling of further amounts subsequently. In March 2010, Malév's tax and social security debt (principal and interest for late payment) totalled HUF 13,7 billion (EUR 51 million). With regard to the entire Malév Group, this figure is HUF 16,8 billion (EUR 62 million). On 11 March 2010, the remaining balance of Malév's current account with APEH was settled making use of part of the cash obtained through the February 2010 increase of capital mentioned further below.

Rather than liquidation, the Hungarian authorities decided to negotiate with VEB and AirBridge so as to try to improve the commercial position of Malév in the medium to long term.

On 26 February 2010, VEB, AirBridge, MNV, Malév and the Hungarian government agreed to a capital increase of HUF 25,4 billion (EUR 94 million), partly realised by injecting fresh capital of HUF 20,7 billion (EUR 77 million) and partly through a debt to equity swap of the advanced payment for Malév GH (see section II.3.2 above) plus interest charged thereon, a total of HUF 4,7 billion (EUR 17 million). AirBridge also swapped HUF 1,5 billion (EUR 5,4 million) into equity. As a consequence, the claims against Malév disappeared and the former creditors became owners of part of the company.

Before the increase, the existing registered capital in Malév was reduced to almost zero to absorb part of the accumulated losses and to reflect the fact that the existing shares in Malév had become worthless. The registered capital of Malév was then increased by issuing new shares in the nominal amount of HUF 0,01 each. The development on Malév's equity situation is shown in Figure 1 below.

The HUF 20,7 billion (EUR 77 million) contributed by MNV in cash enabled Malév to reimburse all outstanding tax obligations (see paragraph (29) above) and to temporarily stabilise its operation.

Between May and August 2010 the Hungarian State provided Malév with a number of "shareholder loans" through MNV totalling HUF 9,2 billion (EUR 34 million).

The first of these loans in May 2010 was in the amount of HUF 2,16 billion (EUR 7,9 million). It was described as a three-year shareholder's loan at an interest rate of 9,97 %. Repayment was by means of a single payment at the end of the maturity period and the security was a lien on the shares of Malév GH.

The second of these loans in June 2010 amounting to of HUF 1,34 billion (EUR 4,9 million) was again a three-year shareholder's loan at an interest rate of 9,97 %, repayment was again by means of a single payment at the end of the maturity period and the security was a lien on the shares of Malév GH.

In August 2010, a third shareholder's loan in the amount of HUF 5,7 (EUR 20,8 million) was granted. This was again a three-year shareholder's loan at an interest rate of 9,97 %, repayable by means a single payment at the end of the maturity period. In this case the security was a lien on an aircraft (HA-LNA - a CRJ jet).

On 24 September, these three loans which totalled HUF 9,2 billion (EUR 33,6 million) along with the interest owed thereon (making a total amount of HUF 9,4 billion or EUR 34,3 million) was converted from debt to equity in Malév in and the underlying guarantees were released.

On 24 September 2010, MNV also increased the capital of Malév by injecting a further HUF 5,3 billion (EUR 19,3 million) of cash into the company. MNV's (i.e. the State's) stake in Malév has thereby increased to 96,5 %

On the same date, the State granted Malév a further shareholder loan in the amount of HUF 5,7 billion (EUR 20,8 million) with a duration of 3 years at an interest rate of 9,97 %. The first interest payment is due 6 months from the date of disbursement while the repayment of principle is by means of a lump sum at maturity. The guarantees on this loan are a registered lien on the HA-LNA CRJ aircraft with an asset value of around HUF 1,8 billion and a lien established on international and Hungarian IATA-organised agent traffic revenue.

According to Hungary, MAVA's activities are limited to a one-time function, i.e. holding certain assets formerly owned by Malév and acting as a "conduit for certain payments between Malév and MFB". MAVA is created only for this very purpose.

The investigation has shown that this transaction (i.e. prolongation of the maturity of the debt, creation of MAVA, transfer of the debt to MAVA, transfer of the assets to MAVA and the lease back agreements) solely aimed at restructuring Malév's debt. Hungary admitted itself that MAVA was never intended to make profit. As a result of this transaction, the debt (together with the assets) was taken off the Malév's balance sheet.

The contracting parties must have been aware that Malév, as a firm in difficulties already in 2007, was not realistically able to fulfil its royalty payment obligation sufficiently. In fact, in the aftermath of this transaction, MAVA's "costs" (i.e. the interest payment to MFB) could not be covered by Malév's royalty payments for the trademark. MAVA has never taken any steps to enforce the outstanding payments.

With regard to the EUR 32 million VEB guarantee, this was intended to cover not only the principal but also the regular interest payments MAVA has towards MFB.

Against this background and given the fact that no adequate equivalent was transferred to MAVA, taking off the debt from the company's balance sheet has to be regarded as an advantage in favour of Malév.

As regards the advance payment by MNV for the (later failed) sale of GH, according to the expert evaluation submitted by Hungary, GH had a net asset value of HUF 1,6 billion and an estimated market value of HUF 3,5 billion in 2009. In fact in January 2009 MNV paid to Malév HUF 1,6 billion as advanced payment. This payment was secured by a pledge on HA-LNA, a CRJ jet (estimated market value HUF 1,8 billion). In February 2009 the preliminary purchase agreement was modified and MNV paid an additional HUF 2,7 billion (total HUF 4,3 billion), and a second rank pledge was registered on the same aircraft.

In their comments to the opening decision, the Hungarian authorities admit that the advance payment was in fact undertaken in order to ensure Malév's liquidity during the negotiation phase of the re-nationalisation.

According to the preliminary purchase agreement, the repayment of this sum was immediately due (2 working days) in case the transaction failed. However, no steps were undertaken by MNV to recover this debt after MNV stepped back from the deal in July 2009. Ex-post interest was only charged - but never paid - when the debt was swapped into equity in 2010. Malév thus had this cash facility at its disposal free of charge.

The Commission is of the view that the measure transferred to Malév an advantage when the repayment of the advance was not enforced after it became due in July 2009. Moreover, an advantage occurred even before, at the moment when the preliminary purchase agreement was modified in February 2009 and the advanced payment increased (above the evaluated market price of the company) without being sufficiently collateralised.

Until July 2008, the statutory interest was charged and paid by Malév according to the deferral schedules. In its decisions the tax authority reasoned by the difficult situation of Malév and the then envisaged restructuring.

As from July 2008, however, Malév stopped paying its tax and social security contributions and the interest (with the exception of one partial payment in December 2008), and no steps were taken by tax authority to recover this debt. Moreover, further payments were rescheduled also after Malév did not comply with the rescheduling agreements. As from April 2009, the tax and social liabilities due as from that moment (i.e. not the earlier already overdue payments) were not even rescheduled anymore without any concrete action taken by the APEH to enforce any of the debt.

The Commission is of the view that no private creditor would have behaved like the Hungarian State. Indeed, no concrete steps were ever taken to enforce the debt as from July 2008. Moreover, the company's financial situation, despite some restructuring efforts continued to be very weak (see Table 1 above), and there was only little or no prospect at all that the company will return to profitability. In similar circumstances, a private creditor would have pursued the enforcement of the agreement. Furthermore, after Malév failed to comply with the rescheduling agreements, no private creditor would have agreed to a further rescheduling.

Therefore, at latest as from July 2008, the non-enforcement of tax and social contributions liability by the tax authority and the further reschedulings transferred an advantage to Malév.

With regard to the February 2010 capital increase, by which the State re-nationalised the airline in which it had not held a stake since its privatisation, the most striking fact is that while 99,95 % of Malév was sold for a price equivalent of ca. EUR 740 000 in 2007, in 2010 the State de facto paid an equivalent of EUR 94 million to regain 94,6 % ownership (by means of the capital increase: partly realised by injecting fresh capital of HUF 20,7 billion and partly through a debt-to-equity swap of the advanced payment for GH of HUF 4,7 billion HUF)), i.e. 127 times the original sales price. This behaviour of the State, especially in view of the fact that in the meantime the airline accumulated losses, continued to have negative equity and no credible restructuring plan was present, is not market conform. In fact, the Hungarian authorities acknowledged themselves that the company has been in "permanent difficulty" and no private investor was willing to purchase Malév early 2010.

As to Hungary's argument that the State was better off by nationalising the company than enforcing its claims against Malév the Commission notes the following. As Hungary acknowledges, in case of bankruptcy, they would have recovered a very small portion of their claims other than the one covered by the VEB guarantee. (In fact, Malév asset value was negative at the time of the transaction.) By contrast, the Hungarian State decided to keep the airline alive by swapping its debt and injecting fresh money in the amount of HUF 20,7 billion (ca. EUR 77 million). No private would have undertaken this further financial burden in a similar situation, especially without realistic chances to return the company to viability.

On the basis of the above the Commission concludes that under those circumstances the February 2010 re-nationalisation of Malév by means of the capital increase transferred an advantage to the company.

It is clear from the Hungarian submission that no private actor was willing to finance Malév, its only funding sources were supplier credits and the liquidity provided by the State. At the time of granting the loans the State could not seriously count on Malév meeting its interest payment obligation and that it would redeem the loan. Moreover, it is also questionable that any private creditor would take the risk to grant a loan which has to be repaid in a lump sum at the end of the maturity to a company in a comparable state like Malév (i.e. permanent difficulty). Finally, in view of the credit history of the company vis-à-vis the State (e.g. non reimbursement of the advance payment for GH, repeated tax deferrals and non-payments), the State and any other investor could not realistically expect that Malév would meet its obligations.

On the other hand, even according to the Reference rate Communication the stipulated interest and collaterals agreed would not be sufficient to rule out the presence of State aid. The stipulated interest rate was 9,97 % whereas the HUF reference rate at the time of the granting amounted to 5,97 %. A mere 400 bps margin over the HUF base rate is insufficient in view of Malév's past performance and financial situation (a company continuously at the edge of bankruptcy). As regards the collateralisation of the loans, the market value of GH (HUF 3,5 billion) in case of Malév's failure is questionable, as Malév was the dominant partner of the ground handling operation: in 2009 63 % of the income was generated by Malév. Therefore, at least in the short term, its economic performance was dependent on Malév's existence and its market value would thus have decreased substantially in case Malév went bankrupt.

In the absence of a credible restructuring plan, it was clear from the beginning that neither the loans nor the capital increase would allow turning around the company which continued to be in a critical state with zero market value. These measures thus are practically equal to a straightforward grant, as the State had no perspective of recovering the "invested" funds.

Therefore the Commission considers that measures 5-8 conferred an advantage to Malév.

The Commission acknowledges that "Malév" as the brand of the Hungarian national carrier operating over decades has a certain value on the aviation market. On the other hand the Commission is of the view that under the specific contractual structure, the value of the brand as claimed by the Hungarian authorities cannot be accepted. An objective value should have been based on an independent evaluation also taking into account Malév's overall financial situation.

As set out above, the Commission is of the view that the measure transferred to Malév an advantage when the repayment of the advance was not enforced after it became due. Moreover, an advantage occurred even before, at least at the moment when the preliminary purchase agreement was modified in February 2009 and the advanced payment increased (above the evaluated market price of the company).

The Commission concludes that such a cash facilty would not have been granted by any private operator. In fact, no private market operator would have agreed to put these funds at Malév's disposal, in particular free of charge and no steps whatever taken to recover them. In fact, in their comments to the opening decision the Hungarian authorities acknowledge themselves that the advanced payment intended to secure Malév's survival (see paragraph (80) above). Therefore, the entire amount of the facility for the period it was at the disposal of the beneficiary is the aid element: between February 2009 and July 2009 HUF 0,8 billion (the difference between the "overpayment" in respect of GH's market value) and between July 2009 and February 2010 HUF 4,3 billion (the entire amount of the advanced payment). Recovery should thus take account of the fact that the amount was swapped into equity in February 2010 (see measure 4 below).

Concerning the deferral and non-enforcement of tax and social contribution, the Commission considers that, all overdue Malév debt from July 2008 to March 2010 towards APEH constituted State aid. Moreover, all rescheduled amount after this date (July 2008) amount entirely to State aid as well. Indeed, nothing suggests that a private creditor would have granted those deferrals and reschedulings. Recovery should take account of the fact that the overdue amounts were paid back in March 2010.

With regard to the capital increase, the Commission considers that, given Malév's financial state, the apparent need for further support following the capital increase, the lack of any realistic prospective to recoup the "invested" funds, no private investor would have put those funds at Malév's disposal. The injected capital of HUF 25,4 billion plus the debt to equity swap of 4,7 billion HUF for the advanced payments for Malév GH is the aid element.

As to the loans totalling HUF 9,2 billion, the Commission considers that in view of the debt history and situation of the airline at the moment of the granting of those loans, the State had no reason whatsoever to expect repayment and at the time of the granting of the loan it was even doubtful whether Malév would be able to pay the interest. In fact, the interest charged was not paid but converted subsequently to equity.

Therefore the Commission considers that the loan can be compared to a straightforward grant and hence the aid element is the entire loan amount of HUF 9,2 billion for the period it was at the disposal of the beneficiary, i.e. between the granting of the tranches (May, June, July 2010 respectively) and the conversion of the loans into equity (September 2010). Due and not paid interest should be included in the aid element. Recovery should thus take account of the fact that the amount was swapped into equity in September 2010 (see measure 6 below).

For the reasons set out above in paragraph (120) above, the Commission considers that total amount of the converted debt to capital can be considered as a straightforward grant and hence the entire amount of HUF 9,4 billion is the aid element starting September 2010.

For the reasons set out above in paragraph (120), the Commission considers that the aid element is the injected capital of HUF 5,3 billion starting September 2010.

For the reasons set out above in paragraphs (120) above, the Commission considers that total amount of the loan is comparable to a straightforward grant and hence the entire amount of HUF 5,7 billion is the aid element starting September 2010.