O'Sullivan: Sighs of relief still too soon

By FRAN O'SULLIVAN

When Finance Minister Michael Cullen's $A150 million cheque goes into Ansett Australia's bank accounts today, there will be huge sighs of relief all round.

The first hurdle in Air New Zealand's road to recovery will have been cleared.

But the sighs of relief do not disguise just how close the national flag carrier has been - and still is - to the precipice of absolute financial disaster.

Last Friday, the Australian Federal Court, under Justice Alan Goldberg, approved a tough settlement deal: Air NZ must pay $A150 million within one business day, or all bets would be off.

Herald investigations have found that without the $A150 million payment - a pivotal element in the Government's $885 million bailout package for Air NZ - the airline faced the prospect of a controversial legal action which, if successful, would have wiped out the airline's shareholders' funds.

Ansett's administrators would inevitably have made good their threats to mount legal action to recover $A400 million which Air NZ's directors pledged to the failing Ansett under a controversial "letter of comfort" signed at their August board meeting.

The directors were sufficiently concerned at the airline's legal jeopardy to order "high level" management internal forecasts in mid- September which factored in the $A400 million figure. The forecasts showed a potential $80 million deficit in shareholders' funds by December 31.

Air NZ was staring at insolvency.

That was plenty of reason for Air NZ and the Ansett administrators to cut their settlement deal and for Dr Cullen to pay over the $150 million.

Hark back to mid-September.

After months of negotiations with the Government and the airline's major shareholders, acting chairman Jim Farmer and then chief executive Gary Toomey were forced to unveil New Zealand's biggest corporate loss: Air NZ had recorded a $1.4 billion deficit for the June 30 year.

The directors' decision to write off Ansett to the tune of $1.3 billion had seen total group equity fall from $1.839 billion to $518 million. Gearing had risen to 93 per cent from 75.5 per cent. Loan covenants had been breached on unsecured borrowing facilities.

Documents obtained by the Herald show that Air NZ's chief financial officer, Adam Moroney - one of the hand-picked team that Mr Toomey had brought across from Qantas earlier this year - advised directors the relevant banks could now make immediate demand on outstanding loans. This would have led to a liquidity crisis and the potential for cross-defaults on secured financing.

The hired guns that Dr Farmer had brought on board in early September to provide directors with an independent view on the management's proposals had seen the writing on the wall when a preliminary trading report for the eight weeks to August 26 showed Ansett Australia had lost $96.2 million on an EBIT basis (earnings before interest and tax).

These figures - which have not been publicly disclosed before today - illustrate why Dr Cullen was so incensed at the worsening state of Air New Zealand's finances that he blew the whistle on the airline's financial problems on September 7.

Air NZ's own survival now depended on it immediately terminating its financial support to its Australian subsidiary - if it could not find a buyer for Ansett.

Hired guns Roger France (independent accountant) and John Waller (PriceWaterhouseCoopers insolvency specialist) were intimately involved in negotiating the "original refinancing package" which was presented to the airline's board on September 12, the same time Ansett was placed into voluntary administration.

"These were difficult negotiations," said Mr France. "Neither of the major shareholders, nor for that matter the Crown, was prepared to make capital funds available by way of an unconditional commitment."

Brierley Investments and Singapore Airlines each pledged $150 million and the Government a $550 million loan at commercial rates.

But by the morning of September 12 - when the terms of the original refinancing package were all but finalised - the parties became aware of the terrorist attacks which had taken place in the United States overnight.

"Over the next week, it became increasingly apparent that the terrorist attacks in the US were going to have a dramatic effect on the profitability of airlines, at least in the short to medium term, and that airlines which did not have a sound capital base had a very high probability of collapse," said Mr France.

On September 14, Mr France asked the company's senior financial management to complete a high-level assessment of its financial position and likely trading results for the rest of the financial year to June 30 next year. .

Mr Moroney's report was put in front of the board on September 21.

Even allowing for a potential residual exposure of $A368 million under the letter of comfort - after deducting the $A32 million wages cheque which Air NZ paid Ansett after the administration began - shareholders funds would be negative $80 million.

The hired guns' advice: In the absence of a capital injection, shareholders' funds would likely be negative, the short-term outlook was difficult because of the terrorist attacks, and knock-on effects from the Ansett collapse and confidence had been lessened.

They advised the airline should seek a fresh commitment from the shareholders and the Government.

Mr France's handwritten notes disclosed that a 5 per cent level of equity might just be possible for a highly leveraged finance company with predictable cash flows, but it was "totally inappropriate" for an airline company.

Air NZ would be unable to persuade anybody to accept a director's appointment under these circumstances.

Mr France and Mr Waller advised the original financing package was inadequate for the changed circumstances, and the directors should not continue to allow the company to trade unless the cost of funding was reduced or removed. The 9 per cent margin over Government stock that the Government wanted for its $550 million loan would add almost $90 million to the company's cost structure at a time when it was under severe financial strain.

Representatives of both Singapore Airlines and Brierley Investments said they would not commit cash without doing due diligence or seeing a new management business plan. "In these circumstances the Air NZ directors were standing at the edge of a financial precipice," said Mr France.

Mr Waller said the board needed to be assured that the financial forecasts for the next ten months were realistic and achievable. An urgent independent review - led by Mr Waller - of the company's cost structure was ordered and recommendations factored into the management's business plan.

The board urgently sought the support of the Government and major shareholders. Failing support being given, the directors would have no option but to request the Government to appoint a statutory manager.

Urgent talks were held with the Government and major shareholders on September 22. "These proved to be extremely difficult and no clear resolution to the impasse between the shareholders and the Crown was evident," said Mr Waller.

The next day, negotiations on the memorandum of understanding which led to last week's settlement deal began in Melbourne.

Ansett administrator Mark Mentha was told, unless a $A150 million settlement for legal exposures could be arranged, Air NZ would itself go into statutory management or become insolvent.

Mr Mentha had several key conditions: First, Air New Zealand had to waive its own claims against Ansett for monies advanced to its subsidiary.

But more importantly, it had to contribute expertise so that Ansett could be kickstarted.

A preferred partner deal between the two airlines, giving Ansett access to Air New Zealand's vital intellectual property, was on the table. Under another deal Singapore Airlines would provide management.

Mr Moroney advised the administrators that without new equity Air NZ had no financial resources to call upon to withstand any major liquidity problems.



The letter of comfort which Air New Zealand's directors wrote to the directors of Ansett Holdings ( in effect, the same directors) confirmed that the wholly owned subsidiaries of the Ansett companies were able to meet their debts as they fell due. Air NZ would make available, on request in writing, advances for the sole purposes of enabling the three Ansett companies to pay working capital liabilities.

But on September 12, the directors of Ansett resolved that in their opinion the company was insolvent, or likely to become insolvent in future, and that an administrator should be appointed.

When the PriceWaterhouseCoopers administrator closed the airline's doors at 2 am on September 14, it had no cash available.

Air NZ later kicked in $A32 million to pay the wages bill.

But the employees' entitlements totalled $A686 million - enough to make the Australian Council of Trade Unions see red.

The Federal Government's $A10 ticket levy will realise $A351 million, but still leaves a deficit.

Mr Mentha estimates total Ansett's unsecured liabilities at $A2 billion.

When Mr Mentha opened Ansett's books, the debtors' "balance" was $A400 million.

But the figure was illusory.

Ansett was not likely to realise more than $A60-80 million from its debtors. Once the grounding took place, charge backs and tickets sales were unlikely to be honoured.

Among those still owed big sums by Ansett are: Credit Lyonnais, Ansett's aircraft lessor ($A420 million); National Australia Bank ($100 million), Caltex, BP and Telstra.

Once Ansett ceased to fly it lost the confidence of its customer base, key clients.

But unless Mr Mentha can keep Ansett Kick Start going until new owners take it on to its next phase, the amount the big creditors will realise will be limited.

As Mr Mentha says, after the terrorist attack in New York it has been difficult to obtain any precise valuations for aircraft leases.

The omens for Air NZ are not auspicious.

Credit Suisse First Boston has estimated that its share price will be still be 17c in 12 months. It rates the troubled national flag carrier a "sell", and on Air NZ's inside forecasts, CSFB's prediction looks likely to be optimistic.

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