The ink has barely dried on Flight Centre Travel Group Ltd's (ASX: FLT) $562 million capital raise as attention turns to yet another coronavirus-hit stock on the S&P/ASX 200 Index (Index:^AXJO).
No I am not talking about Virgin Australia Holdings Ltd (ASX: VAH). That would be too obvious.
The stock in question is Sydney Airport Holdings Pty Ltd (ASX: SYD) as travel related companies took the brunt of the COVID-19 pandemic.
While many believe our largest airport operator holds enough cash to last out the travel bans for a few months, Citigroup thinks the weak link is the group's debt covenant.
Covenant vs. cash
"SYD has not publicly disclosed its covenants, but we understand that one of the covenants is based on cash flow coverage ratio (CFCR), which has not changed since privatization in 2002," said the broker.
"CFCR was 1.5x in 2002 (higher than the covenant), so we have based our analysis for CFCR at 1.5x, acknowledging that it should incorporate some buffer."
Assuming the airport's revenue plunges by around 85% as demand for air travel dries up, Sydney Airport can last till end of September before CFCR reaches the 1.5 times level.
Not all bad news
But there's several other pieces of good news. Even if Sydney Airport's revenue dives to zero, the group's $2 billion in liquidity can see it operate till March 2021, estimates Citigroup.
That fact may be enough to convince its lenders to offer a waiver. After all, these are extraordinary times and even banks are being extremely flexible on mortgagees.
Also, the group's covenant runway may be extended by a further two months to end November if the decline on rents from retailers at the airport were lower than Citi's pessimistic forecasts.
How long will the travel ban last
The biggest determiner on whether Sydney Airport goes cap in hand to investors is how long the travel bans last. If it goes on for six months or more, that could be the line in the sand, according to Citi.
But I believe there are other important considerations that management will need to mull over. Sometimes, it's market expectations rather than actual need that becomes the overriding factor.
Foolish takeaway
If investors think a cap raise is around a corner, buying interest in the stock will dry up and the share price will languish.
Also, one only needs to look at the share price performance of companies that have successfully raised capital. This includes the Webjet Limited (ASX: WEB) share price and Flight Centre.
Both stocks are trading well above the offer price for their respective cap raises. This will make it easier for others to attract interest in any new share offering.
Best to launch a cap raise when the window of opportunity is open as no one can tell if the appetite will still be there next month.
