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Air New Zealand cancels dividend, takes government loan

Air New Zealand plane
Credit: Woodys Aeroimages

Air New Zealand Limited (ASX: AIZ) has cancelled its interim dividend and entered into a loan with the New Zealand Government. The airline is struggling due to the drastic reduction in revenue associated with the coronavirus crisis. Air New Zealand shares have plummeted from over $2.70 in February to just 88 cents currently. 

Government debt facility 

Under the debt facility with the New Zealand Government, the airline will have access to up to $900 million to support itself as it navigates through the coronavirus crisis. The facility will be provided in 2 tranches. The initial tranche of $600 million will have an effective interest rate expected to be between 7% and 8% per annum. The second tranche of $300 million will have an expected interest rate of around 9% per annum. 

The facility will be available for a period of 24 months, with interest rates to step up by 1% if the facility remains after 12 months. Air New Zealand will be able to draw down on funds if its cash reserves drop below a minimum threshold. The availability of each tranche is subject to conditions precedent, which include agreeing on an operating finance plan with the government. 

Cancellation of dividends 

The cancellation of the 2020 interim dividend of 11 cents per share (which equates to a total of $123 million) is another condition precedent that must be satisfied for Air New Zealand to access the facility. The dividend was due to be paid on 25 March. The airline’s board, however, believes cancellation is in the best interests of the airline given the current highly uncertain environment. 

There will be a prohibition on the payment of any dividends by Air New Zealand while any amount is available to be drawn under the loan facility. The airline must give security for the loan over various subsidiaries and their assets. The government will also have the ability to seek repayment through a capital raise by the airline after 6 months, or by converting the loan to equity. 

NZX waiver 

New Zealand Exchange (NZX) Regulation has given Air New Zealand a waiver from NZX listing rules to obtain shareholder approval for entry into the loan facility, due to the recent extraordinary decline in Air New Zealand’s market capitalisation and because directors have confirmed that entry into the loan is in the best interests of shareholders. 

The government is working with Air New Zealand to ensure key services can be provided. These include repatriation flights, maintaining critical cargo transport lines, and having Air New Zealand staff assist in the health response. 

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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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