Government’s $600m loan expansion to Air New Zealand comes with a warning

The Government is extending its loan facility to Air New Zealand by $600 million but at the same time giving the airline a frank and detailed reminder of what’s expected from it.

Taxpayer backstop loans to the airline now total $1.5 billion and shareholding minister Grant Robertson has written to the airline reminding it of the Government’s support to date and what it expects as an “active majority shareholder”.

The airline is told that it must provide domestic flights for a reasonable cost and the Government, which holds a 52 per cent stake, will be involved in board renewal.

Robertson told the Herald the letter was written at “an opportune moment to put on record the Government’s expectations around Air New Zealand as we moved through the Covid-19 era and look to the future”.

Robertson says in a letter to Air New Zealand chairwoman Dame Therese Walsh, and copied to chief executive Greg Foran, that the Government’s expectations need to be considered as the airline develops its strategy and new capital structure.

The boosted loan, which comes with a more favourable interest rate applying across the total, means Air New Zealand will have sufficient liquidity to defer a planned capital raise until the end of September when it will have a clearer picture of the size and shape of it.

Robertson warns that given the critical role Air New Zealand plays in the social and economic success of the country, the Government’s enduring expectations include:

• To be a ‘national airline to support economic development including access to international markets for exporters and tourism once borders reopen

• To maintain a comprehensive domestic route network that allows people and goods to move across New Zealand in a timely fashion and reasonable cost

• To demonstrate a commitment to sustainability, including alternative fuels

• Enhance its role as a leader for best workplace relations

• Continue action as a responsible corporate citizen

• Achieving these objectives while acting as a commercially sustainable and capital efficient business

Friction with unions peaked last year as thousands of staff were laid off and the letter is pointed in relation to acting as a responsible corporate citizen.

Following the Saudi Navy engine repair controversy, Robertson says that the executive and, where appropriate, directors should be aware of activities at the airline and its subsidiaries and make a call on whether they were appropriate.

Air New Zealand is also told as part of capital efficiency it must continuously re-evaluate and optimise its fleet of aircraft and their financing.

“Achieving these expectations and objectives will require alignment of board culture and skills with Air New Zealand’s strategy and stakeholder relationships as part of its ongoing renewal of the board. The Government as major shareholder expects to be involved in the process that will lead to board renewal.”

Robertson points out that nothing in the letter posted to the NZX conflicts with the duties of directors and that the board and executive, rather than shareholders, are responsible and accountable for all company decisions.

He reminds Air New Zealand of the Government’s support, in addition to the expanded loan facility, during an “incredibly challenging time” for Air New Zealand and others in the aviation sector.

Air New Zealand has benefited from air freight subsidies, cancellation of Airways fees, support of the PAYE deferral scheme and wage subsidies of more than $120m.

He told the Herald: “What’s in the letter would not be a surprise to Air New Zealand, it’s what we have talked with them about for some time.”

In a statement Robertson, who is Finance Minister, said the amendment of the loan facility to a debt facility allowed Air New Zealand to benefit from borders reopening.

“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.”

Negotiated within days as the pandemic began paralysing aviation 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) but across both the interest rates will fall.

The existing effective interest rates on the facility are between 7 per cent and 8 per cent on tranche A and around 9 per cent per annum for tranche B.

However under the new arrangement this would result in a total interest rate of around 3.8 per cent for Tranche A and 5.3 per cent for Tranche B.

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.”

The airline had said it would go to the market before the end of June but it was now targeting an equity capital raise to be undertaken by the end of September to give it time to assess market conditions.

Walsh said all amounts outstanding under the government loan will be repaid from the proceeds of the capital raise, expected to be a mix of debt and equity.

The airline has drawn down only $350m of the original government loan but Forsyth Barr analyst Andy Bowley said its cash burn and equity dilution over the last year meant it would need new capital.

It had burned through $1b in cash reserves and, while the transtasman bubble meant it would mitigate some fixed overheads, it was still chewing through cash.

The capital restructure delay was welcome.

“Another three months [and] the vaccination programme should be in full swing and there’ll be a clearer pathway in terms of their recovery.It will certainly help them in terms of understanding their balance sheet needs of the next one to five years,” said Bowley.

His firm expects cash burn will be down from second half of this year guidance of $45m-$55m per month to perhaps $15m-$25m per month. However, the rate of cash burn would deteriorate in the first half of the next financial year given the end of the Government’s PAYE deferral scheme from October 2021.

Harbour Asset Management portfolio manager Shane Solly said the airline may be able to access lower-cost debt capital if its equity structure was reinforced.

The airline has posted a net loss of $72m for the six months ended December, compared with a profit of $101m for the same period in 2019.

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