Sydney - Virgin Australia, the country's second-biggest airline, is tapping investors in a cash call worth more than 80 percent of its market value, aiming to cut debt and cover restructuring costs as it targets lucrative Chinese tourist traffic.
The airline said on Wednesday it would ask shareholders to subscribe to a fully underwritten rights issue worth A$852 million ($628 million), compared with an existing market capitalisation of about A$1 billion. Shares tumbled as the dilutive impact sank in.
The move should ease a debt pile built up during a costly battle for customers with market leader Qantas Airways. It also comes as Chinese investors close in on control of nearly 40 percent of the airline, stoking debate on foreign ownership.
“They had to do it because their debt has been an issue, so they had to bite the bullet,” said Bill Keenan, general manager of equities and researcher at Lonsec Stockbroking. “The issue is the heavy dilution. It always takes the stock price a long time to recover.”
Under the proposal, the outcome of a wide-ranging capital review, shareholders will be offered stock at A$0.21 per share, a 28.8 percent discount to Tuesday's close. By 0330 GMT, the shares were down 11.86 percent to A$0.26.
The rights issue comes hard on the heels of last month's sale of a stake to China's HNA Aviation for A$159 million, raising fund-raising efforts to over A$1 billion.
Virgin Australia said HNA Aviation was among major shareholders who have committed to the rights issue. Chinese conglomerate Nanshan Group, which last week agreed to buy a stake of nearly 20 percent from Air New Zealand has also signed up for the deal, Virgin Australia said.
But as a new boardroom takes shape at the airline, 24 percent stakeholder Etihad Airways has yet to commit to the issue, Virgin Australia said.
“The balance of the funds will be used to pay down debt,” Chief Executive Officer John Borghetti told reporters. According to Thomson Reuters data, Virgin Australia's long-term debt stood at A$2.4 billion at end-2015, giving it a debt-to-equity ratio at the time of 3.07 versus an airline industry median of 1.43.
Borghetti said moves to restructure the business, as it targets growth in Chinese tourism traffic in partnership with its new investor HNA, will involve a “realignment” of an unspecified number of jobs. Savings will also come from reducing the number of aircraft types in its fleet, he said.
Cutting the cost of servicing debt could make a significant contribution to Borghetti's efforts to steer the carrier towards lasting profitability.
Virgin Australia returned to net profit in the first half of its fiscal year, ended December 2015, after racking up three years of annual losses in its bruising price war with Qantas.
REUTERS