The Government is extending its loan facility to Air New Zealand by $600 million as the airline defers its planned capital raise to later in the year.
The $900m Crown loan facility made available to Air New Zealand in March last year has been extended to a debt facility of up to $1.5 billion (an additional $600m) available to August 27, 2023 (an extra 16 months).
The interest rate will be adjusted to "reflect current market conditions". The airline's first $900m tranche had a surprising top interest rate of 9 per cent.
New lower interest rates will apply to the entire loan with a top rate of 5.3 per cent.
Air New Zealand chair Dame Therese Walsh said deferring the capital raise would allow more time to assess the impacts of recent developments on the airline's path to recovery.
"We've seen some clearing of Covid-19 clouds recently, with the extension of the airfreight capacity scheme, the rollout of the vaccine and the opening of the transtasman bubble on April 19," she said.
"These developments are good news and fundamental to Air New Zealand's return to success, but the storm hasn't cleared yet. We have suspended our cash-burn guidance while we take the time to see how these events might impact our outlook."
Air New Zealand is now targeting its equity capital raise to be undertaken by September 31 to give the airline time to assess market conditions.
The Government has also agreed to extend and renegotiate the loan facility, so Air New Zealand has sufficient liquidity to take the airline through to the capital raise.
Finance Minister Grant Robertson said the amendment to the loan facility allowed Air New Zealand to benefit from the increased activity as borders re-open and travel and trade movements increase.
"The Crown's role as majority shareholder has been a major source of stability for the national airline during a very difficult time," he said.
As a result, the airline was in a much stronger position than many airlines around the world.
"We need that strength to be retained because we need a national airline to support economic development and provide access to international markets, and to enable the international tourism we're beginning to see emerge with the opening of the transtasman bubble."
Dame Therese said the airline continued to focus on managing its level of cash burn, and there have been no further draw downs on the Crown facility since interim results, therefore current draw downs on the facility remain at $350m.
She said that both the Crown loan and capital raise are vital to ensure Air New Zealand is set up well for the future, continuing to play its key role in connecting New Zealanders with their friends and whānau, and keeping business links open here and around the world.
"All amounts outstanding under the loan will be repaid from the proceeds of the proposed capital raise. The board expects the final capital raise structure to be a mix of debt and equity."
Walsh said there's a huge amount of optimism in the airline as we look forward to transtasman travel starting.
"After a few months of operating internationally again we expect to have a clearer view of the recovery path for the airline and the long-term capital structure to suit our future business."
Portfolio manager and research analyst at Harbour Asset Management, Shane Solly, said Air New Zealand was still burning cash each month and debt levels are going up.
''Air New Zealand may be able to access lower cost debt capital if its equity structure was reinforced.''
Robertson said that as previously stated, the Crown wants to remain a majority shareholder and will participate in the raise, subject to Cabinet approval of the terms.
The debt-funding agreement is provided on an arm's length basis, with each party having been independently advised.
The commitment fee which is payable on the entire amount of the facility regardless of how much is drawn. The reduction in this takes effect immediately on signing.
On amounts borrowed: the reduction in this takes effect at the next interest rate reset date for existing money borrowed, which is May 27.
Negotiated last March, the original facility comprised two tranches – Tranche A of $600m and Tranche B of $300m. Tranche A will be increased by $400m (taking it to $1b) and Tranche B will be increased by $200m (taking it to $500m).
The existing effective interest rates on the facility are currently between 7 per cent and 8 per cent on tranche A and around 9 per cent per annum for tranche B.
The new interest rate structure is an all-in margin of 350 basis points (comprising 100 basis point line fee and 250 basis point margin) for Tranche A and an all-in margin of 500 basis points (comprising 100 basis point line fee and 400 basis point margin) for Tranche B.
This would result in a total interest rate of approximately 3.80 per cent (using a reference base rate of around 0.3 per cent) for Tranche A and 5.30 per cent for Tranche B (using the same reference base rate of around 0.3 per cent).
The agreement also includes a 1 per cent step-up in the Tranche A and Tranche B all-in margins from 29 October 2021.
Another feature that has been retained is that if Tranche B is drawn on, then Tranche A will have the same interest margin as Tranche B. These features provide an incentive on Air NZ to minimise use of the facility by seeking out other means of reducing cash expenditure.