Cathay Pacific announces HK$39bn recapitalisation proposal led by government

Proposal includes preference shares, warrants, rights issue, a bridge loan and further executive pay cuts

FILE PHOTO: FILE PHOTO: A Cathay Pacific Boeing 777-300ER plane lands at Hong Kong, China August 14, 2019. REUTERS/Thomas Peter/File Photo

Hong Kong-based Cathay Pacific proposed a government-led recapitalisation plan to raise HK$39 billion (Dh18.5bn/$5bn) that includes preference shares, warrants, rights issue and a bridge loan to help the airline survive the dual impact of the Covid-19 pandemic and social unrest in its home city.

"Cathay Pacific has explored available options and believes that a recapitalisation is required to ensure it has sufficient liquidity to weather this current crisis," the airline said.

The carrier has been losing cash at a rate of HK$2.5bn to HK$3bn per month since February 2020. The number of passengers the group carried dropped 64.4 per cent in the first four months of the year against a 49.9 per cent decrease in capacity and a 59.1 per cent decrease in revenue passenger kilometres,  compared to the same period in 2019.

The proposal is expected to place the carrier "in a better position to compete vigorously and to capitalise on any opportunities that may arise as a result of the current crisis and should position Cathay Pacific for growth when the crisis resolves," it said.

Aviation 2020 Limited, a Hong Kong government-related entity, will extend a bridge loan of HK$7.8bn, Cathay Pacific said in a regulatory filing to the Hong Kong stock exchange on Tuesday, where its shares trade. The carrier will issue to the government preference shares for an aggregate subscription price of HK$19.5bn and warrants to subscribe for shares with an aggregate exercise price of approximately HK$1.95bn.

The proposal also includes a rights issue on the basis of seven Rights Shares for every 11 existing shares to raise aggregate proceeds of approximately HK$11.7bn.

Governments around the world have extended rescue packages to their cash-strapped airlines as revenue withered during the Covid-19 pandemic ,which wiped out air travel demand and crippled the aviation industry.

The Hong Kong government's contribution will mark its first capital injection into a private company and underscores the importance of the city's status as a regional aviation hub.

The recapitalisation proposal will also give Aviation 2020 Limited the right to appoint two observers to attend board meetings and have access to management and information for as long as the government-related entity remains a holder of any of preference shares or any amount under the bridge loan remains outstanding, according to the statement.

"The board will continue to explore opportunities to improve Cathay Pacific’s capital structure. If suitable market conditions arise, Cathay Pacific may further access the equity and debt capital markets in order to strengthen its balance sheet," it said.

The board will also implement a further round of executive pay cuts and a second voluntary special leave scheme for employees. This comes after more than 25,000 employees already agreed to an unpaid leave program in February.

In the long term, it will "re-evaluate all aspects" of the Cathay Pacific Group’s business model to meet the air travel needs of Hong Kong, it said.

By the fourth quarter of 2020, the carrier’s management team will recommend to the board "the optimum size and shape of the Cathay Pacific Group to meet the air travel needs of Hong Kong, while keeping Cathay Pacific’s financial status at a healthy level and meeting its responsibilities to shareholders," it said.

"Inevitably this will involve rationalisation of future planned capacity compared to the pre-crisis plans, taking into account the market outlook and cost structure at that time."

Cathay Pacific shares will resume trading on the Hong Kong stock exchange on 9am on June 10, after trading was halted on June 9 pending today's announcement.

The Covid-19 pandemic is "the biggest challenge to the aviation industry that Cathay Pacific has ever witnessed and, overall, it does not anticipate that there will be a meaningful recovery for an extended period," the carrier said.

Morgan Stanley was financial adviser for Cathay Pacific on the proposal. Morgan Stanley, BOC International, HSBC and BNP Paribas acted as underwriters to the rights issue.

The Asian airline is particularly impacted by coronavirus-related travel restrictions as it has no domestic network and depends on cross-border travel, which still remains limited and is subject to quarantine constraints.

Cathay Pacific has grounded most of its fleet as demand plunged during the coronavirus crisis that resulted in travel restrictions and country lockdowns.

The carrier currently operates cargo services and limited passenger flights to cities Beijing, Los Angeles, Singapore, Sydney, Tokyo and Vancouver.

In March, Cathay Pacific reported a 28 per cent drop in profit for 2019 as revenue declined and finance charges rose. Net profit attributable to the owners of the company for the year ending December 31 plunged to HK$1.69bn.

In May, the carrier said it made an unaudited loss of HK$4.5bn at its full-service airlines Cathay and Dragon during the January to April period and described its financial outlook as “very bleak."

Other carriers have also sought government financial aid to survive the Covid-19 crisis.

Lufthansa, Europe's largest carrier, is receiving a €9bn (Dh37bn/$10bn) bailout from Berlin.

US carriers have also benefited from a $50bn government bailout, while Latam, South America’s biggest carrier, has filed for bankruptcy.