Government backs Air New Zealand as Trans-Tasman bubble opens

  • Hon Grant Robertson

The Government is continuing to support Air New Zealand while aviation markets stabilise and the world moves towards more normal border operations.

The Crown loan facility made available to Air New Zealand in March 2020 has been extended to a debt facility of up to $1.5 billion (an additional $600 million) available to 27 August 2023 (an extra 16 months). The interest rate will be adjusted to reflect current market conditions.

Air New Zealand has also decided to defer its planned equity capital raise until 30 September 2021. This will give them more time to assess market conditions. As previously stated, the Crown wants to remain a majority shareholder and will participate in the raise, subject to Cabinet approval of the terms.

Minister of Finance Grant Robertson said the amendment to the loan facility allows Air New Zealand to benefit from the increased activity as borders re-open and travel and trade movements increase.

“The Crown’s role as majority shareholder has been a major source of stability for the national airline during a very difficult time.

“As a result, our national carrier is in a much stronger position than many airlines around the world. We need that strength to be retained because we need a national airline to support economic development and provide access to international markets, and to enable the international tourism we’re beginning to see emerge with the opening of the Trans-Tasman bubble.

“We also need a national airline to provide a domestic network that allows people to be where they want to be across New Zealand and gets goods where they are needed,” Grant Robertson said.

The Crown Standby Loan Facility agreed in March 2020 was a measure that provided the time for Air New Zealand to reposition its operations and facilitate the implementation of an optimal long-term capital structure. The amended loan agreement retains this expectation and the provision of the conversion of the loan to equity at the request of the Crown. Air New Zealand’s intention is that all amounts outstanding under the facility will be repaid from the proceeds of its proposed capital raise.

* Note to editors

The debt funding agreement is provided on, and was negotiated on, an arms’ length basis, with each party having been independently advised. The original facility comprised two tranches – Tranche A of $600m and Tranche B of $300m. Tranche A will be increased by $400m (taking it to $1b) and Tranche B will be increased by $200m (taking it to $500m).

The existing effective interest rates on the facility are currently between 7% and 8% on tranche A and around 9% per annum for tranche B. The new interest rate structure is an all-in margin of 350 basis points (comprising 100 basis point line fee and 250 basis point margin) for Tranche A and an all-in margin of 500 basis points (comprising 100 basis point line fee and 400 basis point margin) for Tranche B. This would result in a total interest rate of approximately 3.80% (using a reference base rate of around 0.3%) for Tranche A and 5.30% for Tranche B (using the same reference base rate of around 0.3%).

The agreement also includes a 1% step-up in the Tranche A and Tranche B all-in margins from 29 October 2021. This is a similar feature to the existing facility, albeit with the timing of the step-up adjusted to reflect the new proposed timing of the capital raising. Another feature that has been retained is that if Tranche B is drawn on, then Tranche A will have the same interest margin as Tranche B. These features provide an incentive on Air NZ to minimise use of the facility by seeking out other means of reducing cash expenditure.

The loan agreement does not affect the Government’s operating position or net debt as it is a commercial loan which is expected to be repaid when Air NZ raises capital.

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