Air New Zealand has reworked the terms of its financial support package from the Govt, including reduction in the amount of borrowing by $500 mln, but a new issue of redeemable shares up to $1 bln

Embattled national airline Air New Zealand has entered into a reworked financial support package with the Government, which increases the available overall support to $2 billion from $1.5 billion.

The reworking of the package would suggest that perhaps consideration is being given to deferring again an already deferred planned substantial capital raising for Air NZ.

At the moment the airline is utilising a $1.5 billion debt package from the Government. But under the terms of a new agreement announced on Tuesday this debt package will be reduced to $1 billion.

However, the airline will now be able to issue up to $1 billion of redeemable shares to the Government - so, making a total package of $2 billion available. But crucially, half of the money potentially advanced by the Crown is now equity, rather than debt.

Earlier this year Air NZ announced pre-tax losses for the June 2021 year of $440 million.

Analysts' estimates have suggested the airline could lose about $700 million before tax in the current year, although that situation may have worsened as the Auckland Delta lockdown dragged on.

The latest reshuffle of the Crown package comes after the Government, which owns 52% of Air NZ on behalf of the taxpayer, got the airline to defer a planned capital raising till the first quarter of next year.

The Tuesday announcement gave no update on the timing of that capital raise, although there are references within in it to the airline raising "at least" $1 billion of new capital - which is consistent with what sharebroker analysts have been forecasting.

As noted higher up the article, however, the reworking of the Crown support is maybe suggestive of yet another delay being considered for the capital raising.

The reshuffled Crown support follows the beleaguered, Covid-struck, airline having suffered even more through the lockdown and isolation of its main domestic destination Auckland since mid-August. Aucklanders are now allowed to fly from Wednesday (December 15).

In the meantime Air New Zealand says it has, as of Tuesday, drawn $505 million of the existing Crown Loan.

"It is currently estimated that drawings could be approximately $900 million by late February or March 2022. This reflects the estimated cash flow impact of ongoing travel restrictions including as set out in the airline's announcement on 17 September 2021 and the previously communicated repayment of $300 million of PAYE, which is required in early 2022," the airline told the NZX in a statement.  

The statement, signed off by Air NZ chair Therese Walsh noted that the Government has recently outlined a plan of phased reopening of borders from early 2022, "which, in the airline’s view, provides an indicative pathway to reopening New Zealand for international travel".

"However, the future impacts of Covid remain uncertain and circumstances continue to change all over the world.

"In that context, the airline has been considering its financial support requirements during the period up to a planned equity raising – which the airline is still targeting for the first quarter of 2022 - together with what further support and flexibility may be needed if material and unexpected events were to occur in 2022 such that it becomes prudent to consider a further delay to the planned capital raise," Walsh said.

The statement lays out the - complicated - terms and conditions of the issue of the redeemable shares. It doesn't, however, indicate at what price the shares may be issued - only the dollar amounts to be raised.

It is Air New Zealand’s intention that all amounts outstanding under the amended Crown Loan and any issued redeemable shares will be repaid from the proceeds of the company’s proposed equity raise, together with an aligned debt capital markets transaction. The Crown has confirmed to the airline that it shares this expectation, the statement says.

Air NZ can start issuing the shares once it has drawn $850 million of the Crown debt facility. So, by the airline's own estimates this would suggest it will start to issue those shares in February of next year.

The agreement's a very long-term one - the shares don't have to be redeemed for 25 years - IE till December 14, 2046. The Crown doesn't have the right to convert them into 'ordinary' shares. Nor are the shares entitled to dividends - but they do pay interest. The starting rate will be 3.5% 'margin' on top of the ninety-day bank bill rate (which is currently about 0.89%). 

That's actually going to be a higher yield for the Government than the debt facility, which is set to go up to 4%.

The airline can, however, itself redeem the shares at any time. 

Air New Zealand has the option to defer the interest payments on the redeemable shares, "and must do so in certain circumstances, including upon an insolvency event", the company statement says.

"If a distribution has been deferred on the redeemable shares, the unpaid amount of the distribution cumulates, capitalises and compounds on each dividend payment date and will be added to all amounts outstanding to the Crown.

"Air New Zealand will not be able to pay dividends on its quoted ordinary shares during any period whilst a distribution in respect of the redeemable shares has been deferred," the airline says.