Air New Zealand lives on but is its future sound?

By Nick Stride

Friday 5th October 2001

Air New Zealand is not out of the woods yet, analysts and investment managers said yesterday.

"On our calculations, after the recapitalisation the net asset backing is about 23c," Arthur Lim, an airline analyst at Macquarie Equities, said. "As an airline it will continue to make losses."

The airline's $885 million recapitalisation is subject to an array of conditions including due diligence by the government, which could end up owning as much as 83%.

Simon Botherway of Arcus Investment Management said the deal with the voluntary administrator running failed Australian subsidiary Ansett didn't necessarily close that chapter.

"Ansett's bankers may still feel they have recourse to Air New Zealand.

"The administrator won't be able to contract out of those obligations, if indeed there are any," Mr Botherway said.

The administrator has estimated the value of Ansett's assets exceeds that of its debts but a final determination is still some weeks away.

One of the conditions of the government's bail-out is that the Crown is "satisfied as to the extent of the company's residual exposure ... to Ansett" by today.

Mr Botherway said the airline was still highly geared. He estimated its debt, including capitalised lease obligations and the $300 million loan from the government, at far more than the $2.4 billion widely quoted.

Shareholders' funds at August 31 were $156 million or 21c a share. With the government's injection of the maximum of $585 million the figure rises to $741 million.

Conditions of the government's equity injection include agreement by Air New Zealand's unsecured bankers not to call in their debts before December 31, 2003.

Damien Prentice of Challenger Coronet agreed the airline's debt levels were still high.

In 2000 it had $1.3 billion of short term debt and $2.5 billion of long-term debt. It had incurred losses since and the value of capitalised lease obligations was unclear.

"What the value of the business is going forward I don't know," Mt Prentice said. "It's too early to say."

Another uncertainty facing investors was Air New Zealand's governance.

Acting chairman Jim Farmer said yesterday that the airline would continue to be run purely on a commercial basis.

But, Mr Prentice said, the government was now in control and would have national interest considerations to take into account.

"If Helen [Clark] and Dr Cullen decide they don't like Jim, then he won't have a job," Mr Prentice said.

Other conditions of the deal include minority shareholders collectively owning 2% or more of the company not exercising their minority buyout rights.

Given the massive dilution of those shareholders - from 45% of the company to a minimum 7.5% - that can't be guaranteed.

Air New Zealand's shareholders also have to approve the plan. As Brierley Investments and Singapore Airlines, holding 55% of the current share capital between them, have pledged to support the plan that appears to be a foregone conclusion.

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