Continuous Disclosure: Why is Air NZ raising capital and how does a rights issue work?

Air New Zealand is undertaking one of the largest capital raisings in New Zealand’s corporate history and is asking its investors to dig deep with a $1.2 billion rights issue.

But many of those investors are new to share investing and might not have taken part in a rights offer before.

This week Continuous Disclosure talks to Sharesies CEO Leighton Roberts about why companies raise capital and how a rights offer works – and what happens if shareholders do nothing.

Sharesies has 100,000 users who own shares in Air New Zealand, one of the most popular stocks on the platform.

Roberts says companies typically undertake a capital raising when they need cash and Air Zealand has been chewing through its cash over the past two years with travel being severely affected by the Covid-19 pandemic.

“They have talked about two years of turbulence. During that time the company did receive a lot of support from the New Zealand Government. But they have been burning a lot of cash so every month they have been spending more than they have been earning.”

A rights issue is one way they can raise cash by selling more shares. It’s seen as quite a fair way for retail investors.

But investors face plenty of risks to weigh up.

“There are lots of things investors might think about when deciding to invest and some of these are relevant to any company.

“They include the price of the shares versus what someone thinks they are worth and someone’s time horizon.”

Roberts says Air New Zealand has made it clear it won’t be cashflow positive for a while so it’s going to be a long-term investment.

He says investors need to get clued up on what the company plans to do with the money while considering its track record and the risks of it being able to deliver on its plans in the future.

“Airline companies typically do have a lot of operational overheads so they have very large fixed costs: aircraft, parking at airports, access to airports, large staff numbers – so small changes in revenue can affect their ability to make profits and even in good times Air NZ paid reasonably high dividends, which can be an indication of the risk.

“Even before coming into Covid airlines were seen as riskier investments.”

Investors who can’t afford to buy the extra shares or don’t want to can sell their rights.

But those who do nothing risk having their investment diluted, which effectively means they will own less of Air NZ at the end of the capital raise.

“Our investors tend to work very individually and I think that is probably contrary to popular belief.People will make a decision for themselves but in general, from other events, we have seen a quite high take-up.”

Continuous Disclosure is available on IHeartRadio, Spotify, Apple Podcasts, or wherever you get your podcasts. New episodes come out every second Wednesday.

You can find more New Zealand Herald podcasts at nzherald.co.nz/podcasts or on IHeartRadio.

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