Shares in Air New Zealand plunged in value by more than 40 per cent after the Government announced it will lend up to $900 million to the national carrier as it faces “unprecedented challenges” created by the coronavirus pandemic.
Airline and government officials have been scrambling to finalise a financial lifeline for the airline which has cut international capacity by between 80 to 85 per cent and warned up to 3750 staff could be made redundant due to the impact of Covid-19 on air travel.
Finance Minister Grant Robertson said the debt funding agreement, announced on Friday morning, was negotiated on “an arms’ length basis”, with each party independently advised. He said it was possible the debt could be turned to equity at the Crown’s request, which would increase the Government’s existing 52 per cent shareholding in the airline.
When the New Zealand stock exchange opened at 10am and Air New Zealand shares were lifted out of a trading halt that had been in place since Monday its shares immediately dropped by 44 per cent to trade at 87 cents.
* Air New Zealand cuts long-haul capacity by 85 per cent, ‘dropping 30% of staff’
* Coronavirus: Air New Zealand suspends 13 Australian routes, cuts trans-Tasman capacity by 80 per cent
Shares in Air New Zealand have fallen 64 per cent this year, wiping nearly $2 billion off its market capitalisation.
The loan will be provided in two lots – a tranche of $600m with interest expected to be between 7 per cent and 8 per cent and a second tranche of $300m at an expected 9 per cent interest rate.
UBS aviation analyst Marcus Curly said it was forecasting Air New Zealand to be burning $211m a month from the start of April while Forsyth Barr analyst Andy Bowley estimated Air New Zealand’s monthly overheads to be $160m a month.
In the 2019 financial year Air New Zealand had cash reserves of $1.1b and its labour bill was $1.4b. In 2019 it generated $5.8b in revenue.
Robertson said the risk of Air New Zealand shutting down was real and the loan option was chosen because it could be moved forward “at pace”.
“The reality is that without this intervention today New Zealand was at risk of not having an airline with national carrier status,” Robertson said.
“That was not acceptable.
“I’m extremely mindful of the uncertainty and the anxiety of the staff of Air New Zealand. We will be doing our very best by these staff.”
Separately, and distinct from the agreement, the Government is working with Air New Zealand to ensure other key services can be provided, including repatriation flights, maintaining critical cargo transport lines and having Air New Zealand staff assist the health response.
Those services will be provided for under separate commercial arrangements to be negotiated in the future between the airline and the Government.
Robertson said key trade routes to keep open were Australia, the United States, Singapore and Hong Kong.
The loan will be available for two years.
The interest rates on both tranches will increase by 1 per cent if the loan remains after 12 months.
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Air New Zealand must satisfy other conditions in order to have the loan available, including the cancellation of its 2020 interim dividend of 11c a share which equates to a $124m, that was announced to the market on February 27 and was due to be paid to all shareholders, including the Government, on March 25.
Robertson said it must also meet minimum service provisions including continuing to fly to key international destinations and safeguarding the domestic network with flights continuing to all current destinations.
“Air New Zealand has a unique and critical role in our economy and society. Also, the Government owns 52 per cent of the company, which means we have a responsibility towards it. We have acted swiftly to put this loan agreement in place and support our national carrier.”
Air New Zealand has been hit hard by the coronavirus outbreak, slashing flights and warning of redundancies of 30 per cent of staff.
“This agreement means that Air New Zealand is in a position to play its part in making sure Kiwis can return home from overseas and that essential flights and freight lines for goods like pharmaceuticals remain open by ensuring flights continue to and from key international destinations. The agreement also safeguards the domestic network, with flights assured to all current destinations,” Robertson said.
“While today’s action means the company can continue to operate, given the unprecedented shock to the global aviation industry caused by Covid-19, Air New Zealand has advised that there will unfortunately be job losses as capacity is cut.
“The Government is actively working with Air New Zealand on what can be done to support these workers. This includes work underway through a separate process to mobilise some of Air New Zealand’s workforce to other areas of our fight against Covid-19, including supporting the health response.
“This shows how we are all working together in New Zealand in this battle against the virus,” he said.
“Air New Zealand will play an important role in our economic recovery, when the disruption caused by this global pandemic is over.”
Both Air New Zealand and the Government acknowledge that the terms of the facility do not alter the fundamental principles of their relationship.
The airline’s board of directors, Greg Foran as chief executive and the executive team maintain responsibility for all commercial and operational decisions of the airline.
Other terms of the agreement include no payments by Air New Zealand of any dividends or other distributions to shareholders, including the Government, over the two-year loan period.
The Government can seek repayment after six months through a capital raise by the airline or converting the loan to equity.
Waivers for shareholder approval for the loan were granted because of the recent, “extraordinary decline” in Air New Zealand’s market capitalisation, and on the grounds that the loan is in the best interests of all shareholders, other than the Government.
Economist Benje Patterson said the loan had been negotiated on tough terms.
“Make no mistake, the Government has put on the hat of tough businessperson.”
The interest rate was at levels which reflected the risk, he said.
“The Government wants Air New Zealand to be able to function because of the public good element of air connectivity, but doesn’t want to be seen to be giving a corporate handout.”
The only chance Air New Zealand had of ever paying the money back before the interest crippled it was if the crisis went away quickly, he said.
“If the problem lasts longer then the Government has cleverly included clauses that the debt can be converted to capital.
“Essentially this means that if the coronavirus outbreak persists more than the next few months, without a quick path out, then the Government’s proportional shareholding will creep up.”
The Government had found a backdoor to diluting the shareholdings of other investors, he said.
“But it is unlikely to be criticised for not giving all investors an equal opportunity to invest from the get go as the reality is that without the initial loan, Air New Zealand wouldn’t last until Easter.”
Air New Zealand chairman Dame Therese Walsh said the airline was greatly appreciative of the Government’s support of a loan facility as the airline navigates its way through the unprecedented challenges created by Covid-19.
“The Government and Treasury moved swiftly to ensure that Air New Zealand had financial certainty as demand for flights domestically and internationally has rapidly fallen due to travel restrictions implemented by countries around the world,” Walsh said.
“The loan facility ensures that Air New Zealand can continue to play a vital role in connecting New Zealanders and our businesses with each other here at home and around the world.”