AirAsia X Bhd (AAX), Malaysia’s long-haul low-cost carrier, is perhaps, seen as the first victim of the Covid-19 pandemic when it called upon a restructuring scheme to resurrect the airline back to life after being hard hit by lockdowns and consumer demand that just evaporated overnight.
In its filing with the exchange, AAX revealed a complex restructuring scheme whereby its paid-up capital will be reduced by as much as 99.9%, leaving its share capital at a meagre RM1.53mil from RM1.53bil. At the same time, the company will carry out a rights issue exercise to raise at least RM100mil and up to RM300mil.
In addition, AAX will raise up to RM200mil via a special-purpose company (SPV) to be incorporated by Datuk Lim Kian Onn, with a minimum subscription of RM50mil. The SPV may also subscribe for an additional 15% of the enlarged share base after the rights issue and proposed subscription.
The basis of the rights issues has not been determined just yet but nevertheless, the company will proceed to undertake a share consolidation exercise whereby the 10 shares will be consolidated into one new share, resulting in the current shares outstanding being reduced from 4.14 billion to 414.8 million.
Effectively, the company’s net asset value per share based on the latest quarterly results for the period ended Sept 30 will be reduced from a deficit of about 28 sen per share to a deficit of RM2.77 per share. Of course, this is prior to the rights issue exercise and placement of shares being executed.
Interestingly, even if AAX is able to raise RM500mil from a rights issue or via a placement of new shares to selected investors, its shareholders’ funds on a proforma basis will remain negative – a key point to note and understand as to whether the business model is still sustainable or otherwise.
Talking about rights issue, this will not be the first time that AAX is calling for one, as it did a rights issue on the basis of three rights shares for every four AAX shares held at an issue price of 22 sen per rights shares in 2015. As a sweetener then, AAX issued one free warrant for every two rights shares subscribed. This rights issue raised some RM391mil in gross proceeds for AAX.
AAX, in actual fact, was listed in 2013 when it came to the market raising as much as RM987.7mil with at an initial public offer (IPO) price of RM1.25 per share. AAX’s IPO entailed an offer for sale of 197.53 million shares and a public issue of 592.59 million shares. Hence, the gross proceeds received by the company from the IPO was RM740.7mil. Together with the first rights issue that was carried out two years post-listing, AAX has raised some RM1.13bil from the public.
Airline is never an easy business as not only it is competitive but also subject to the vagaries of oil prices, exchange rates as well as financial issues related to accounting treatment and high capital expenditure. AAX reported net losses between 2013 to 2019, with total accumulated losses of RM1.66bil during the period, and with reported net loss of RM1.16bil in the first nine months of 2020, AAX’s total losses since 2013 is RM2.82bil.
Since its listing until its current latest reported quarter, AAX shareholders’ funds has deteriorated by about RM1.73bil, which is after taking into consideration the gross proceeds from the IPO and rights issue.
Can AAX be saved? What is AAX post-recapitalisation?
In late July, AAX announced that its auditors has issued an unmodified audit opinion with emphasis of matter on material uncertainty relating to going concern in respect of AAX’s audited financial statements for the financial year ended Dec 31,2019 and that AAX’s shareholders’ equity on a consolidated basis was 50% or less of its share capital.
With that, effectively AAX triggered the Practice Note 17 (PN17) of Bursa Malaysia’s Listing Requirements (LR) but as the regulators have given affected companies a relief from being classified as PN17, AAX was not required to comply with obligations pursuant to paragraph 8.04 and PN17 of the LR for a period of 12 months from the date of triggering the criteria.
Nevertheless, AAX was rather forthcoming to announce its recapitalisation plan in an announcement in early October. In that maiden filing with Bursa Malaysia, AAX announced a restructuring plan involving RM63.5bil of debts to be reconstituted into indebtedness by AAX for a principal amount of up to RM200mil.
AAX also said that any balance in excess of reconstituted amount shall be waived while all existing contracts and agreements previously entered into with the relevant creditors will be deemed terminated. Airline customers who had purchased or made advance payments for flights will receive travel credits with extended validity for future travel or purchase of seat inventory. Although this initial announcement called for a capital reduction of 90%, this was later revised to 99.9%.
The RM200mil that will be reconstituted into new indebtedness will be repaid by AAX in three equal annual payments from the third year of implementation of the debt restructuring. These debts will also carry an interest rate of 2% per annum.
AAX also explained that post-restructuring, its focus will shift towards medium-haul flights of between five and six hours and it will operate with up to 25 A330 aircraft.
One of the challenges in AAX’s recapitalisation plan is understanding its level of indebtedness as at the June 30 accounts. The total liabilities, excluding advanced sales to customers, was about RM6.4bil.
The accounts also showed capital commitments in the form of future aircraft purchases amounting to RM141.3bil! While there were no breakdowns provided for the half-year period, a check with AAX’s audited statements showed that as at the end of last year, this figure was RM135.3bil, of which RM64.4bil were for aircraft purchases to be delivered between one to five years and RM70.9bil was for more than five years.
The question is, are capital commitments in the form of future aircraft purchase constitute a legitimate liability for a corporate, given that these are in actual fact off-balance sheet items? A check with several sources indicate that it really depends on the nature of these capital commitments.
Are there penalties for cancellation and at which point do these capital commitments move from being an off-balance sheet item to an actual liability? It is rather perplexing to comprehend as to why would an aircraft manufacturer allow an airline to have capital commitments equivalent to almost 1,000 times the company’s latest audited shareholders’ funds. Down south, Singapore Airlines too have a rather huge capital commitment sitting as an off-balance sheet item, but that figure is only about 2 times its shareholders’ funds.
In actual fact, AAX should come clean on the figures that constitute its group-wide restructuring scheme and whether the RM63.5bil figure is an overestimation or otherwise. As it is, AAX is trying to shrink its liability by as much as 99.7% by reducing its total liability from RM63.5bil but in actual fact the reduction of its total liability should be from RM6.4bil.
Even if AAX is saved from the brink of total wipe-out, post-restructuring, AAX will still be up against negative shareholders’ funds as it is unlikely the current deficit (i.e. post restructuring but before rights issue and issuance of new shares to the SPV) would be reversed. With just between RM150mil and RM500mil in fresh capital, depending on the level of acceptance in the rights issue exercise and amount taken up by the SPV, AAX’s wings will remain clipped and it would be tough to compete in the open market.
AAX should consider a better option to resurrect the airline. Otherwise, it is perhaps time to axe AAX.
Pankaj C. Kumar is a long-time investment analyst. Views expressed here are his own.
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