Air New Zealand 5-year bonds to be priced next Friday; Could be 300 basis points over swap rate

By Gareth Vaughan

Air New Zealand's planned five-year bond offer, set to be the national carrier's first bond issue in 20 years, will be priced next Friday with the annual interest rate investors' will be paid to be set somewhere between 6.90% and 7.20%.

The top end of that range is 300 basis points above the five-year swap rate of 4.2%, as of Friday afternoon. The five-year unsecured, unsubordinated, fixed rate bonds won't carry a credit rating and nor will they be guaranteed by the airline's major owner, the taxpayer.

Air NZ's prospectus has been registered with the Companies Office. The national carrier is seeking to raise a minimum of NZ$100 million and a maximum of NZ$150 million. The offer won't be open to over subscriptions. The trustee for the bonds will be Guardian Trust.

The prospectus notes that the bonds, issued at NZ$1 each for a minimum investment of NZ$5,000, won't be assigned a credit rating.  Air NZ itself has an issuer credit rating of Baa3 from Moody’s Investors Service with a negative outlook. That's Moody's lowest investment grade rating.

The bonds are being offered in New Zealand to New Zealand resident investors only. A pool of bonds worth NZ$4 million has been reserved for Air NZ shareholders and staff who are able to buy up to NZ$30,000 worth each. The offer, revealed by interest.co.nz last month, will be Air NZ's first bond issue since a wholesale issue in 1991.

Money raised for 'general corporate purposes'

Writing in the prospectus Air NZ chairman John Palmer says the bond offer provides New Zealand investors with the opportunity to have a different form of investment exposure to the 73.72% government owned airline. The National Party has indicated that it might reduce the government's stake to as low as 51% should it be re-elected in the November 26 election.

"Despite the difficult economic conditions, Air New Zealand has continued to significantly improve its market positioning over the past few years," Palmer writes. "This has been achieved through increases in capacity and investment in its fleet, its staff and innovation and continued expansion of its alliances with other airlines."

"Air New Zealand continues to invest in its fleet with new planes such as our new Airbus 320 domestic fleet, and innovations like the 'Skycouch' seats in our Boeing 777-300s, which are proving an attractive product to our international customers," says Palmer.

He says money raised in the bond offer will strengthen Air New Zealand’s liquidity position, and will be used for general business purposes.

"The offer diversifies Air New Zealand’s funding sources away from sole reliance on overseas aviation debt markets," Palmer adds. As of June 30, Air NZ had cash of NZ$860 million and a 46.7% gearing ratio.

Annual earnings tumble

Air NZ posted its June year financial results yesterday which showed normalised earnings before tax (which exclude net gains and losses on derivatives that hedge exposures in other financial periods) almost halved to NZ$75 million from NZ$137 million in the previous year. CEO Rob Fyfe said the combination of reduced demand for travel following the devastating Christchurch and Japan earthquakes, plus additional capacity added to Christchurch to help the relief effort, cut an estimated NZ$70 million from earnings.

Fyfe said in the absence of both a further deterioration in global economic conditions and an escalation in fuel prices, Air NZ's leadership expects a better financial performance in its 2012 financial year.

The company hedges its exposure to jet fuel prices typically for 12 month periods with a target of being 80% hedged for the next six months, with total hedges representing about 60% of 12 month uplift.

The prospectus notes that bondholders have no right to require Air NZ to redeem their bonds before the November 15, 2016 maturity date, except in the case of a default. Air NZ is applying to NZX to have the bonds listed on its debt market.

The bond trust deed doesn't establish any security over Air NZ's assets with bondholders claims in a liquidation ranking equally with all other unsecured, unsubordinated creditors but ahead of shareholders. As of June 30 Air NZ had aircraft and aircraft related assets with a book value of NZ$1.539 billion pledged as security over secured borrowings and finance lease obligations with a book value of NZ$1.255 billion.

Also as of June 30, NZ$170 million held on deposit by payment service providers ANZ and BNZ was ranked ahead of bondholders claims in the event of a liquidation.

Government tender result awaited

Meanwhile, Air NZ is currently awaiting the outcome of an 'all of government air travel tender process' through which it's being asked to bid to provide air passenger services to the government. The airline says the government is currently its biggest passenger services customer representing 4.6% of 2011 financial year passenger revenue.

"The outcome of this tender process is unknown," Air NZ says. "However, if Air NZ was to lose a significant part of the air passenger service to another airline, this would have a material adverse effect on the Air New Zealand group's financial performance and therefore the ability of of Air New Zealand to perform its obligations under the bonds."

Interest on the bonds will be paid twice yearly, with the first interest payment on November 15 this year. The offer opens on September 5 and closes on September 23, with NZX trading expected to start on September 30.

The offer arranger and joint lead manager is First NZ Capital with Craigs Investment Partners the other joint lead manager. ANZ, BNZ and Forsyth Barr are co-managers.