News
Cathay Pacific says government-led recapitalisation “only plan available”; loans to be repaid in short term
June 12th 2020
Cathay Pacific chairman, Patrick Healy, told reporters this week the airline group had few options to secure its financial future when he detailed a HK$39 billion (US$5 billion) capital raising that will result in the Hong Kong government joining the group’s share register. Read More »
Under the recapitalisation plan, the Hong Kong Special Administrative Region (HKSAR) will emerge with a 6.08% stake in Cathay after committing to buy HK$19.5 billion in newly issued preference shares and HK$1.95 billion (subject to adjustments) of warrants. The HKSAR also pledged a HK$7.8 billion bridging loan facility to the airline group.
Major shareholders Air China, Swire Pacific and Qatar Airways committed to fully participate in a rights issue expected to raise HK$11.7 billion. Nonetheless, their holdings would be diluted as a result of the government becoming a shareholder.
Speaking to reporters on Tuesday, Healy said the government-led recapitalisation was "basically the only plan available to Cathay” and absolutely critical to its survival.
"What would the alternative have been? Quite frankly without this plan the alternative would have been a collapse of the company," Healy said in response to a question.
"The reality, given the extent of the global pandemic and its impact on the aviation industry worldwide, is the commercial debt markets are effectively closed to airlines today who do not have extensive government and shareholder support."
The HKSAR will receive a dividend from its preference shares, with the coupon to start at 3% in the first three years and increase in steps to 9% after five years, giving Cathay the incentive to pay down the preference shares at the earliest opportunity when cash flows allowed.
Finance Secretary, Paul Chan Mo-po, told reporters on the day of the package’s announcement it was not the intention of the government to hold the investment long term.
It planned to appoint "seasoned professionals or business leaders", rather than government officials, to the two observer positions on the Cathay board that will be created as part of the HKSAR’s investment in the airline group.
Cathay Pacific Group CEO, Augustus Tang, said: "We asked for assistance from the government, so we made the request."
The recapitalisation plan will offer Cathay some respite from a short-term liquidity squeeze. The company has been experiencing cash burn of HK$2.5 billion to three billion a month since February after starting the year with HK$20 billion in unrestricted liquidity.
"The latest recapitalization proposal is timely and offers a much-needed and significant cushion for [Cathay]'s depleting cash reserves," JPMorgan Securities transport analyst Calvin Wong said in a research note, according to media reports.
BOCOM International transport analyst, Luya You, said the recapitalisation plan and the contribution of the Hong Kong government bode well for Cathay's future.
“Cathay has received possibly the biggest vote of confidence from the Hong Kong government during the most challenging year in its history,” You told the South China Morning Post newspaper.
“It’s a big signal to the rest of the market that Hong Kong considers Cathay integral to the city’s future growth and economic health.”
Bank of America Merrill Lynch analyst, Nathan Gee, said in a research note: "While Cathay Pacific faces the challenge of no domestic market, making it far more dependent on lower-for-longer international travel, it has a leading cargo business which benefits from tightness caused by reduced passenger flights."
Beyond securing its short-term financial stability, Cathay management was working on a new business plan regarding the scale, shape and size of the company to be presented to the board by the fourth quarter of calendar 2020.
Healy said some "tough decisions" would have to be made by the fourth quarter and added nothing was off the table.
"Our short-term challenges are significant, but our long-term future remains bright," Healy said.
The airline group's monthly traffic report, published on Friday, showed Cathay Pacific and its regional wing, Cathay Dragon, carried 18,473 passengers in May, down 99.4% from a year ago, equating to an average 600 passengers a day.
While the 29.6% load factor represented a 53.3 percentage point decline from a year earlier, it was an improvement from 21.7% in April.
Cathay group chief customer and commercial officer, Ronald Lam, said Cathay Pacific/Cathay Dragon planned to operate about 3.5% of their capacity this month and 9.4% next month. But Lam cautioned the plans were contingent on further relaxations on travel restrictions globally and were subject to change.
