Government wrestles stakeholders for Air NZ

By Nick Stride

Friday 28th September 2001

TOUGH TUSSLE: Brierley CEO Greg Terry and Prime Minister Helen Clark are locked in a negotiation armwrestle

Disguised by the daily public barrage of Air New Zealand pronouncements, a deadly armwrestle is under way between the government and the airline's major shareholders.

At risk for Brierley Investments and Singapore Airlines, which together hold 55% of Air New Zealand's shares, are more than $1 billion of investments.

Air New Zealand needs, by most airline analysts' calculations, at least a further billion of equity to become viable. At June 30 the airline had debt of $2.4 billion and equity of $518 million but that will have been eroded further by the losses the airline has been sustaining in recent weeks.

SIA and BIL face an unenviable situation.

The Singaporean carrier in August last year paid $567 million for a 25% holding in B shares, buying a 17% stake from BIL and topping up on-market.

At that time BIL's 30% holding in A shares was worth $425 million.

At this week's lows of 17c for the B shares and 18c for the As, SIA was showing a paper loss of 94% of its investment and BIL 91%.

The questions now are how much more money they are prepared to commit to the rescue plan and at what the price they will get further shares.

SIA has already baulked at paying the $1.31 a share originally agreed on. Under a second agreement BIL and SIA committed to pay 67c a share. But with the price bouncing around at, at best, half that amount, they will have trouble explaining to their shareholders why they agreed to pay so much.

But at this week's share-price lows the $300 million the two have previously agreed to commit would buy them, added to their existing shareholdings, 86% of the airline.

For its part the government is reported to be unwilling to commit public money to shore up the airline if that will have the effect of transferring wealth from the New Zealand taxpayer to SIA and BIL's shareholders.

It has told Air New Zealand's board to knock the shareholders' heads together and come up with a workable plan.

Air New Zealand's independent directors have leverage over BIL and SIA in that they can threaten to ask the government to appoint a statutory manager.

Insolvency experts say the manager has powers to tip Air New Zealand's assets into a new company and leave its shareholders and creditors high and dry. But, they say, the statutory management option has huge risks attached.

If the government agreed to appoint a manager it would face a political backlash from minority shareholders, who would lose their investments. Also to be taken into account would be the damage to New Zealand's reputation as an attractive country in which to trade and invest.

Finance Minister Michael Cullen has also pointed out that, under statutory management, Air New Zealand would face the risk its aircraft and other assets could be seized by creditors in overseas jurisdictions.

Insolvency practitioners say the issue is complicated.

New Zealand companies face different regimes in different countries according to what protocol, if any, has been agreed on.

In the UK, for instance, the protocol recognises the New Zealand insolvency regime for the assets of New Zealand-based companies.

British creditors can't jump ahead of the queue by seizing assets in their own jurisdiction.

Different rules apply in Australia, the US and Asian countries.

So, as Dr Cullen has pointed out, before a manager could be appointed, deals would have to be done with those countries in which Air New Zealand's assets would be at risk.

Whether a manager was appointed or not some sort of compromise may also have to be negotiated with the administrator of Air New Zealand's defunct subsidiary Ansett.

Air New Zealand acting chairman Jim Farmer has said a "corporate veil" shields Air New Zealand shareholders from any exposure to Ansett's liabilities.

The administrator has also estimated the value of Ansett's assets exceed its debts.

But until these matters are determined conclusively it is possible any injection of capital, either by the government or by SIA and BIL, will end up in Ansett creditors' pockets.

The uncertainty over the Ansett position is further complicating the due diligence process the government, SIA and BIL are undertaking.

Any request from Air New Zealand to appoint a manager would also have to go through the full process. As one analyst put it, "without that the independent directors could face a very expensive lawsuit from BIL and SIA."

It is understood the Air New Zealand board has given itself a deadline of today in which to take a fresh rescue plan to the government.

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