Cathay Pacific share price soars 17% a day after US$5bn bailout

The airline saw its stock skyrocket on Wednesday, but analysts say this is unlikely to sustain with shares facing a potential 43% dilution.

Shares of Hong Kong flagship carrier Cathay Pacific Airways opened 17% higher on Wednesday 10 June 2020, a day after the airline announced a HK$39 billion (US$5.03 billion) recapitalisation financing programme by the government.

Based on IG trading data, shares started at HK$10.32 per share on Wednesday. This represented a HK$1.50 increase from the stock’s closing price of HK$8.81 on Monday.

Trading on Cathay Pacific’s counter was suspended on Tuesday as the company prepared for the announcement of the bailout plan.

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Cathay Pacific to issue HK$19.5 billion of warrants to Hong Kong government

On Tuesday, the airline revealed a recapitalisation plan comprising three tranches:

  • Tranche A: Cathay Pacific will issue HK$19.5 billion in preference shares with detachable warrants to the Hong Kong Special Administrative Region (HKSAR) Government after requisite shareholders’ approval has been obtained.
  • Tranche B: Cathay Pacific will launch a HK$11.7 billion rights issue of shares to existing shareholders after requisite shareholders’ approval has been obtained.
  • Tranche C: the HKSAR Government will provide a HK$7.8 billion bridge loan facility to Cathay Pacific, available for drawdown immediately.

The warrants (convertible to shares) will reportedly carry an annual coupon rate of 3% for the first three years, before increasing to 5% in the fourth year, 7% in the fifth year, and finally 9% in year six, after which the airline will have an option to redeem them.

This share-convertible option would mean the Hong Kong government could possibly end up with as much as a 6% stake in the airline.

Daiwa Capital Markets analyst Kevin Lau wrote in a client note that the Cathay Pacific’s share price is likely to face downward pressure because of a potential 43% dilution caused by the recapitalisation shares issuance.

According to the press release, the three-part plan is designed to provide Cathay Pacific with sufficient funds to withstand the industry-wide downturn, and a stable financial platform from which it will be able to conduct the wholesale review of operations required to transform its business for the future.

Cathay Pacific has been burning through HK$2.5 billion of cash monthly

Cathay Pacific has experienced several headwinds since mid-2019, when protests first broke out in Hong Kong. Coupled with the outbreak of Covid-19, the airline says it has seen a ‘sharp decline’ in passenger traffic this year.

While the airline has taken many actions to conserve cash, including cutting passenger capacity by 97%, implementing executive pay cuts, deferring new aircraft orders and carrying out the early retirement of older aircraft, as well as implementation of a voluntary special leave scheme (which had an 80% employee uptake), the collapse in air travel has created unfavourable conditions for the airline.

‘Despite all these measures, the collapse in passenger revenue to only around 1% of prior year levels has meant that we have been losing cash at a rate of approximately HK$2.5 billion to HK$3 billion per month since February, and the future remains highly uncertain,’ said Cathay Pacific Chairman Patrick Healy.

He added: ‘The infusion of new capital that we have announced today does not mean we can relax. Indeed (it is) quite the opposite. It means that we must redouble our efforts to transform our business in order to become more competitive. Today we have announced a new round of executive pay cuts, and a second voluntary special leave scheme for our employees.’

Management to ‘right size’ the airline in Q4 2020

The Cathay Pacific management team says it will recommend to the Board of Directors the optimum operating size of the Cathay Pacific Group, while still keeping the company’s financial status at a healthy level, and at the same time meeting shareholder responsibilities.

‘Tough decisions will need to be made in the fourth quarter of this year to get Cathay Pacific to the right size and shape in which to compete successfully and thrive in this new environment,’ said Healy.

Healy did not elaborate on what he meant by ‘right size’, or whether there will be any layoffs at the airline. He did however state that those ‘tough decisions’ will involve rationalisation of future planned capacity compared to our pre-crisis plans, taking into account the market outlook and cost structure at that time.

How to trade aviation stocks with IG

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