Hong Kong Airlines defers US$24 million in semi-annual interest payments on bond, raises doubts over repayment of mounting debt
- Airline notifies bondholders that it will defer payment on US$683 million perceptual bond
- Interest rate jumps by five percentage points to 12.125 per cent due to deferral
Hong Kong Airlines, the city’s third-largest carrier, notified bondholders on Wednesday that it will defer US$24.33 million in semi-annual interest payments for a perceptual bond due on July 26.
“The issuer has today given a notice in respect of its election to defer the distribution, which is scheduled to be paid on the distribution payment date falling on 26 July, 2020,” Blue Skyview Company, a vehicle that issued the US$683 million notes in 2017, said in a notice, which the South China Morning Post has seen.
The deferral raises doubts about Hong Kong Airlines’ ability to pay mounting debt over the longer term, as the coronavirus continues to ground most of the carrier’s passenger fleet. The airline will have to bear a higher interest rate, up from 7.125 per cent to 12.125 per cent, for failing to submit its 2019 financial report to bondholders by the end of May, and failing to cure the breach after a 30-day grace period.
“As a private company, we do not comment on our financial activities publicly,” Hong Kong Airlines said in an email when approached for comment. Blue Skyview did not respond to a similar email.
The bonds’ first call date is also on July 26, but the airline has not indicated that it will exercise the option to redeem the notes. Its creditors said this was unlikely, given that the company had decided to postpone its coupon payment.
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The failure to disclose its financial report to bondholders, or the coupon payment deferral, would have resulted in a 5 per cent increase in the interest rate. As the airline had already failed to submit the report, as required in its prospectus, the increase in coupon was unavoidable, which is why the airline chose to defer the payment, the creditors said.
It did, however, submit the report to the Air Transport Licensing Authority. “A corporate licensee must provide to the Air Transport Licensing Authority within 6 months after the end of a financial year the audited financial statements of the corporate licensee relating to that financial year. As of writing, all corporate licensees have provided the latest annual financial statements,” it said in an emailed statement.
Airlines must submit financials to the authority to maintain their licences. Hong Kong Airlines said on Thursday that it “always complies with government regulations and provides information to authorities as requested”.
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The airline is still looking for a white knight, with due diligence ongoing. But there has been little progress because of disagreements over pricing and uncertainties amid the pandemic. Air China and Wuxi Communications Industry Group have held talks with Hong Kong Airlines about a potential sale.
Hong Kong Airlines’ mounting debt reflects a wider trend where the global aviation industry has been hit hard by the pandemic. Demand has declined dramatically amid government restrictions on travel, and airlines globally are expected to report US$84 billion of losses in 2020, 3.2 times higher than during the 2008 global financial crisis, according to the International Air Transport Association.
Some countries have started to gradually open their boarders, but Hong Kong is caught in a third wave of Covid-19 cases. The resumption of flights by the city’s carriers is likely to be delayed further. Hong Kong Express, the low-cost carrier owned by Cathay Pacific Airways, announced this week that it will postpone the resumption of flights until August 2 from an original start date of July 12.
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Hong Kong Airlines, which is part owned by cash-strapped Chinese aviation conglomerate HNA Group, meanwhile, has received more than 1 billion yuan (US$143 million) in funds since January from a working group in charge of HNA’s debt restructuring, according to sources. Chinese state-owned banks are providing the lifeline, they said.
