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Cathay Pacific sells convertible bonds to buttress finances as air travel remains in the doldrums amid lingering Covid-19 pandemic

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Alison Tudor-Ackroyd alison.t-a@scmp.com
·4 min read
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Cathay Pacific Airways is planning one of its biggest bond sales to buttress its finances as Hong Kong's hometown airline struggles to ride out the travel slump forced by the global coronavirus pandemic.

The HK$6.74 billion (US$869 million) five-year convertible bonds maturing in February 2026 will be offered at par with a coupon of 2.75 per cent, the top end of the marketing range of 2.25 per cent and 2.75 per cent payable twice a year, according to people familiar with the transaction.

The bonds can be converted into the airline's Hong Kong-traded shares, at a premium of 30 per cent over the reference price of HK$6.59 per share. The bonds were marketed at a premium between 30 per cent and 40 per cent. Cathay Pacific sold an additional US$155 million of the bond above the base size of the deal. BNP Paribas, BOC International, HSBC and Morgan Stanley are working on the deal.

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The convertible bond marks another attempt to shore up its finances after an abrupt 27 per cent increase in its monthly cash burn to HK$1.9 billion, as the global coronavirus pandemic drags on and adds to the worldwide slump in travel demand.

Proceeds from the debt sale will be used for general corporate purposes, Cathay Pacific said in a stock exchange filing on Wednesday without providing details.

Cathay Pacific, which shut its Cathay Dragon unit last year and made 5,900 jobs redundant to save HK$500 million every month, said on Monday it may have to axe a quarter of its profitable cargo capacity because a 14-day quarantine and seven-day medical surveillance proposed by Hong Kong's government would force it to cut its flight capacity by almost two-thirds.

Long-haul routes form most Cathay's passenger and cargo capacity, and any cutback on flights would mean a significant loss in revenue.

Aircrew arrive at the Hong Kong International Airport, Chek Lap Kok, after a ban on all passenger flights from Britain in bid to stop mutated strain of Covid-19 from reaching the city on December 22, 2020. Photo: Nora Tam alt=Aircrew arrive at the Hong Kong International Airport, Chek Lap Kok, after a ban on all passenger flights from Britain in bid to stop mutated strain of Covid-19 from reaching the city on December 22, 2020. Photo: Nora Tam

Cathay Pacific raised HK$39 billion last year, with a HK$27.3 billion financial lifeline by Hong Kong's government, to survive the pandemic. It was the biggest corporate bailout by Hong Kong's government in two decades, giving Cathay Pacific roughly 15 months of cash burn, according to calculations by analysts at the time.

A convertible bond was mooted at the tail of the rights issue, but was ultimately rejected because it would create too large of a stock overhang, people familiar with the transaction said at the time. A government backed rescue for Singapore Airlines did include convertible bonds.

The return to the convertible bond underscores the continued deterioration of the global aviation industry. One of the largest fleet operators in Asia, Cathay Pacific flew 1,290 passengers every day according to its December report, and its indication of how full its planes were fell to a record low of 18.4 per cent.

Cathay Pacific's operations remain in constant flux given the travel restrictions and health requirements in its key markets, such as Britain and Australia, and face further tightening at home because of mutant strains of the coronavirus.

Through most of last year, the airline maintained a skeletal flight schedule reflective of severely depressed demand amid ongoing border closures and travel restrictions around the world.

Last month, the airline said it was expecting to lose even more money than it did in the first half of last year. Cathay lost HK$9.87 billion between January and June 2020.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.