Air New Zealand shares sank to near two-decade lows today following a Government loan package which could lead to effective re-nationalisation of the airline.
The airline's shares plunged to 84c during the day after trading resumed following a four-day halt. Shares recovered to close at 99c. One analyst said the $900 million Government backstop was judged to be too small.
However, new chief executive Greg Foran said the loan facility of $900m was the figure the airline sought during negotiations with the Government and the Treasury. The airline still has about $1b in cash and short term deposits.
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The loan will come in two tranches: $600m at an effective interest rate expected to be between 7 and 8 per cent, followed by $300m at a rate of 9 per cent, which has raised eyebrows in the investment community. The airline had tried banks, but amid mayhem in the airline industry, private loans were not available.
Foran said the interest rate was on a loan that was ''a commercial facility'' for an industry that was under significant pressure around the globe.
''It's clear we need to pay the right amount, hopefully we don't need to use it,'' he said.
As part of the deal, Air New Zealand cancelled its interim dividend payment of 11c per share, or $123.5m. The company also agreed not to pay dividends while the loan is outstanding.
The Government can seek repayment through a capital raising after six months, or converting the debt to equity, which would result in it substantially raising its stake in the airline beyond the current 52 per cent and effectively re-nationalising the company.
Foran said there were only loose assumptions given uncertainty about the duration of the coronavirus crisis, but he was ''happy that the $900m sees us through what we believe is going to be required.''
The airline was shrinking rapidly from 3600 flights a week to 1500 a week in the coming months. As part of the deal with the Government, Air NZ must maintain skeleton international routes and a reduced domestic network.
The company is working with four unions over job cuts which could leave up to 30 per cent of its 12,500 staff out of work.
Its labour bill was around $1.3b in the last year.
Foran said Air New Zealand has already seen an 85 per cent reduction in revenue from international flights and as much as 70 per cent on the domestic front.
"You can't take costs out of your business quickly enough to counter that," he said
Foran said the airline industry would look very different when the coronavirus virus passed.
"Not all airlines are going to survive this. Others born out of this event will operate differently to what airlines do today.''
Finance Minister Grant Robertson announced the package this morning and when asked whether the airline may need more, he didn't rule that out. It seems the will to support the airline, no matter the cost, is a bottom line.
"We need a national carrier at a time like this and in the future," Robertson said.
"We had a company that was well run and well-governed but an amazing outside event occurred to it."
Asked again whether it was too big to fail, he reiterated: "We must have a national carrier."
The airline started the year at $2.93 a share for a market value of $3.29b.
Rickey Ward, New Zealand equity manager at JBWere, said the size of the loan was too small given that there was speculation that $2b to $3b was needed.
"If this is the playbook for how Government assistance will occur, then as existing shareholders your interests would appear to be secondary, especially if the initial loan is not nearly enough," Ward told BusinessDesk.
"Converting to equity is effectively nationalising the investment and diluting any other shareholder ownership. You can see why the market has said that it has become un-investable."
Robertson the form of support was chosen for speed, with the risk of a shutdown a real possibility.
"They've been in discussions with their banks" and it was clear such support was unlikely to be available from any other source than the Government, he said.
The 2001 bailout of Air New Zealand consisted of a $300m loan and buying $585m of new shares.
The loan was converted to equity in 2005 following a $186m rights issue the previous year when the Government bought another $150m of shares to give it 80 per cent ownership.
The Government yesterday announced $270m of support for aviation services, largely covering Government fees and keeping air traffic services operating. It signalled a $600m package to support the aviation sector.