At the 11th Hour: Cathay Pacific narrowly escapes collapse with jumbo bailout plan

July 2, 2020

2 min read

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What's going on here?

Earlier this month Cathay Pacific, Hong Kong’s flagship airline carrier and the world’s largest international cargo airline, announced a HK$39bn bailout plan as part of an unprecedented government-led rescue deal to help the company withstand further downturn in the coming months.

What does this mean?

On 9 June 2020, following a brief pause in share trading activities by majority shareholders, Cathay Pacific announced its three-tranch government-led recapitalisation plan. “Tranches” represent the stages at which certain monies in a loan term are made available

The first tranche entitles Cathay to immediately draw down a bridging loan of HK$7.8bn. In return for this cash injection, the second tranche sees Cathay issue HK$19.5bn of preference shares with detachable warrants. A detachable warrant essentially grants the right to purchase further shares in the issuing company at a certain price and before a certain time. Warrants are attractive, as incoming investors can detach and sell the warrant should share prices rise above the original cost of its purchase. The third tranche involves a HK$11.7bn rights issue (additional shares sold to existing members) to majority shareholders Swire Pacific and Air China, in accordance with their shareholder agreement.

This three-part refinancing plan leaves the Hong Kong government with a 6% interest in Cathay Pacific and Swire Pacific and Air China with slightly reduced stakes at 42% and 28% respectively.

What's the big picture effect?

For Cathay, this bailout package was unavoidable. The 2019 protests and the coronavirus pandemic represented a double-hit in consumer demand for the airline, which took an acute financial toll. 

As an international airline carrier, Cathay was highly dependent on its international commercial and cargo flights to stay competitive. With no domestic mainland routes it can rely upon, Cathay suffered losses of around HK$2.5 to 3 billion from April 2020 onwards, a similar predicament faced by rival Singapore Airlines. With most of its planes grounded at airports, the airline operated on just 3% of its normal capacity in May 2020. This dismal statistic corresponds with falling passenger traffic growth rates at Cathay, which is down 99% compared to last year’s performance.

That the Hong Kong government has made an unprecedented decision to offer financial relief to Cathay highlights the peculiarity of their plight. The state bailout has secured the airline’s short-term future, but the Hong Kong government will now expect the airline to address existing financial and operational problems.

Report written by Roslyn Lai

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