Market warns of risks Air New Zealand is running

Friday 18th May 2001

IN THE GUN: Sir Selwyn Cushing 'pulled the trigger on the Ansett deal'

By Nicholas Bryant

Some of Air New Zealand's institutional investors said yesterday a deeply discounted rights issue was urgently needed or the country's flag carrier would be the next local airline in receivership.

The airline's only other option, which would put egg on the faces of chairman Sir Selwyn Cushing and his board while destroying huge shareholder value, is to sell part or all of Ansett Australia to Singapore Airlines for a massive discount.

"It's exactly the same situation Qantas New Zealand found itself in - if the shareholders don't stump up then the thing goes bust," Arcus Investment Management's Simon Botherway said.

Arcus has decided not to invest in the national flag carrier.

Mr Botherway added that the notion Air New Zealand might get money from the government was "totally inappropriate and ridiculous from the outset."

Other sources said a government cash injection was looking like a dead issue.

At press time Air New Zealand still had not approached the government for a meeting.

The important parties in Air New Zealand's short term future are now large equity investors like AMP Henderson and ANZ Nominees.

Their views will have a major influence on whatever strategy Air New Zealand's new management team comes up with.

Big and small investors alike got burnt by Air New Zealand last September when the company registered a capital raising prospectus full of good news. Though the $284 million rights issue was undersubscribed, many took up their rights in full only to get the surprise of their lives when Air New Zealand issued a profit warning two weeks later.

While supportive of Air NZ chief executive Gary Toomey and his new management team, all the major institutions The National Business Review spoke to this week were highly critical of Sir Selwyn and the board.

But changes to the board are not likely for some months and in the meantime it is faced with a cash conundrum.

There are few options for filling the $700 million-plus short term hole in its balance sheet.

That money is urgently needed to sign leases for new aircraft to replace Ansett Australia's antique fleet of 767s.

Sir Selwyn has said the cost of the total fleet upgrade over the next decade is estimated to be $5-6 billion.

While government funding looks unlikely, raising debt is not an option either; with debt of about $3.1 billion, Air New Zealand is "leveraged to the eyeballs," one commentator said.

Its ratio of net debt to net debt plus equity is about 59%, leaving no leeway to take on any significant additional debt in the near future.

Also unlikely is getting the government to relax the rules relating to its bilateral air service agreements.

According to Rudd Watts & Stone lawyer Murray Denyer, the agreements are important despite recent liberalisation of aviation agreements around the world.

Formerly with the Ministry of Foreign Affairs and Trade, Mr Denyer helped draft and negotiate the country's most recent multilateral air services agreement.

"Most of our bilateral agreements have strict ownership provisions ... the aeronautical authorities of other countries scrutinise Air New Zealand and keep a close eye on ownership provisions, as do some powerful airlines.

"The government has been pushing for greater ownership possibilities for New Zealand airlines in the future but for now effective control must be here."

So Air New Zealand would not be able to sell more of the company offshore to the likes of eager 25% shareholder Singapore Airlines.

Its only options are a rights issue, similar to the one that refinanced Fletcher Forests, or an embarrassing sale of Ansett, on which Air New Zealand would book a huge loss and be back at square one.

The Ansett sale is a last resort in most people's eyes, except for one party: Air New Zealand's 30% shareholder, Brierley Investments.

It has been looking to exit Air New Zealand for a long time and, according to sources close to the company, would be loath to see the value of its investment further diminished.

But that is simply bad luck, according to Mr Botherway.

"What is Brierley going to do? Let it go bust; otherwise it has to be recapitalised and they have to put their hands in their pockets ... sure Brierley doesn't want to put any more money in but Selwyn [also Brierley Investments chairman] pulled the trigger on the Ansett deal. They've only got themselves to blame."

BT Funds Management's fixed interest manager Andrew South sees rich irony in the possibility of Brierley Investments having to front up with more capital.

"I was stunned when Air New Zealand did the original rights issue and then proceeded to pay an unimputed dividend to Brierley and other shareholders - that was ridiculous to be honest."

Despite the inequity of paying a dividend at the same time as it was raising capital, by making the dividend unimputed Brierley Investments, now based in Singapore, paid only 15% withholding tax while local investors paid either 33% or 39% tax on the 9c a share dividend.

Comments from our readers

No comments yet