Alternative Views: Beyond AirAsia’s RM1bil fundraiser

This article first appeared in Forum, The Edge Malaysia Weekly, on July 19, 2021 - July 25, 2021.
Alternative Views: Beyond AirAsia’s RM1bil fundraiser
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AirAsia Bhd's fundraising exercise of up to RM1.02 billion should not come as a surprise. The low-cost carrier (LCC) is bleeding due to the collapse in air travel during these Covid-19 pandemic years.

The group incurs a burn rate of more than RM260 million per quarter, based on its latest quarterly results. The amount raised should cover its operational cash flow needs for the next nine months or less. That does not take into account the other operating expenses that the airline would need to look at on a longer-term basis.

Towards this end, AirAsia has stated explicitly that the funds raised would not be sufficient to address its long-term financial predicament but would help cover its interim requirements while it explores other options. These options include securing loans from the government through Danajamin Nasional Bhd and monetising its digital assets. The funding from Danajamin — if it comes through — is reported to be about RM1 billion. But so far, nothing has happened.

As for its digital assets, AirAsia is looking at several avenues, including injecting them into a special purpose acquisition company (SPAC) in return for cash.

In the meantime, what do AirAsia shareholders do as they are faced with a cash call? Do they subscribe for the rights issue of redeemable unsecured Islamic debt securities (RUIDS)? Or should they cash out, considering the uncertainty of the air travel industry and the possibility of the airline raising more money in the future?

First, AirAsia is not a stock for the faint-hearted. The airline has a good business model but the industry is going through turbulence and there is no light at the end of the tunnel yet.

Secondly, the RUIDS, although offering an attractive return of 8% on an investment of 75 sen, is an unsecured instrument. This means that if AirAsia were to go through a restructuring exercise, the RUIDS holders rank just above its shareholders.

Nevertheless, if any airline were to survive this storm, AirAsia stands the brightest chance.

Long-term shareholders of AirAsia — having reaped the benefits of handsome dividend payouts amounting to a total of RM5.1 billion in 2018 and 2019 — should have no qualms in subscribing to the RUIDS.

This is provided they hold the view that the industry will recover sooner than later.

On this score, AirAsia’s latest announcement on the proposed fundraising gives a hint of when the company expects its balance sheet to look better. According to the details of the fundraising announcement, it has the option to start redeeming the outstanding RUIDS from the fourth year onwards, which probably means that it expects to enjoy healthy cash inflows by 2025.

As for investors who had bought into the LCC in the last 18 months and believe that the airline industry will recover sooner than later, they have to take a long-term view.

The first option is to hold on to the shares, go through the exercise, and hope that the company will ride through the tough period without having to go through a restructuring or seek more cash from shareholders. Second, they could take some money off the table but continue to hold some exposure to the company.

They can opt to subscribe to the RUIDS, for which they will get free warrants, and sell their AirAsia shares after the ex-date of the exercise. For every six shares held, shareholders need to fork out RM1.50 more for two RUIDS and one free warrant. If there is an appreciation of the shares, shareholders can always convert the RUIDS or exercise the warrants.

The 8% return of the RUIDS amid a low interest rate environment is a reflection of the risk of the instrument.

The RUIDS are unsecured debt convertible to equity and rank just above shareholders should the company need a restructuring. When the likes of the Employees Provident Fund (EPF) average risk-free returns of 5% or more, is an unsecured convertible instrument issued by an airline offering 8% attractive enough?

It would be for some of the more risk-averse investors if they believe that the recovery of the air travel industry would be stronger than expected.

AirAsia has secured underwriting for 50% of the RUIDS. It includes 26.3% held by AirAsia’s largest shareholders, Tan Sri Tony Fernandes and Datuk Kamarudin Meranun, who have to jointly fork out some RM256 million for their portion of the RUIDS.

AirAsia has not secured the underwriting for the remaining 50% of the instruments.

The strongest selling point for the fundraising exercise is the 8% return on the RUIDS. Also, travel patterns in other markets that have opened up their economy suggest that the rebound in air passenger traffic will be strong.

The downsides are that the RUIDS are unsecured, and the unpredictability of when cross-border air travel will take place.

AirAsia’s biggest markets are destinations within five hours of air travel. These include India and China — two countries where air travel is not likely to thrive anytime soon.

Within the region, leisure travel does not look like it is going to happen soon either. So, it leaves AirAsia with the domestic market to contend with as the economy opens up.

In the region, airlines have adopted different strategies to stay on top of the pandemic. Singapore Airlines has lined up S$15 billion to sustain though the downturn.

In Indonesia, it is a different story altogether. The government is not prepared to pump any more money into the national airline, Garuda, pointing to its inevitable collapse. Lion Air co-founder Rusdi Kirana, who is having difficulty negotiating with lessors of the planes, is linked to a new LCC called Super Air Jet.

AirAsia started its journey with only two planes and without money. Today, it has 210 planes operating in Malaysia, Thailand, Indonesia and the Philippines. And it certainly needs big money to sustain operations.

M Shanmugam is contributing editor at The Edge

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