Malaysian Airline Needs State Rescue as Cash Falls: Asean Credit

Malaysia is expected to rescue its flagship carrier with a fourth capital infusion since bailing out the airline after two tragedies and record cash burn, analysts at two of the nation’s biggest lenders said.

Parent company Khazanah Nasional Bhd. needs to spend at least 2 billion ringgit ($629 million) to take Malaysian Airline System Bhd. private and replenish its working capital within the next 12 months, according to estimates by Hong Leong Investment Bank Bhd. and RHB Capital Bhd. The sovereign wealth fund has spent almost 5 billion ringgit in three cash calls since its unit Penerbangan Malaysia Bhd. first rescued the carrier in November 2002.

Penerbangan Malaysia’s $1 billion of 5.625 percent notes due March 2016 have fallen 1.96 percent since March 8, when flight MH370 crashed into the Indian Ocean, paring returns to 0.57 percent. Benchmark three-year government notes in the Southeast Asian nation have risen 7.28 percent, Bloomberg-compiled prices show, while dollar-denominated debt of Asian air carriers has gained 5.9 percent, according to Bank of America Merrill Lynch indexes.

“For any airline which gets into difficulties due to unforeseen reasons, a restructuring is likely to be in the interest of all stakeholders,” said Mark Hyde, the Hong Kong-based global head of restructuring and insolvency practice at law firm Clifford Chance LLP. “It must be a massive plus to have a shareholder like Khazanah, given the substantial investment in political and economic terms.”

‘Comprehensive Review’

Malaysian Air is seeking to halt three consecutive years of losses as its outlook dimmed after flight MH17 was shot down in Ukraine on July 17 and MH370, the remains of which still haven’t been found. Saving the airline has already exceeded the amount Malaysia spent bailing out its biggest tollroad company in 2001, following the Asian financial crisis in the mid 1990s.

Khazanah yesterday reiterated a July 3 statement, saying a “comprehensive review of all restructuring options is being undertaken and evaluated.” Reports about a possible merger with AirAsia X Bhd. are “unfounded and speculative,” it added.

The fund has nothing more to add over and above the statements it’s already made, spokesman Asuki Abas said by phone on July 23.

Malaysian Air plans to present a restructuring plan to Khazanah as early as this week, people familiar with the matter said on July 21, asking not to be identified because the talks are private.

The task is the biggest yet for Chief Executive Officer Ahmad Jauhari Yahya, 60, who has presided over a 66 percent slump in the share price since joining the company in September 2011. His options range from a stock delisting to a filing for bankruptcy, one of the people familiar said. The stock has dropped 6.3 percent to 22.5 sen since March 8.

Debt Solution

“Saving the airline is beyond mere financial calculations,” said James Lau, who oversees $300 million as an investment director at Pheim Asset Management Asia Sdn. in Kuala Lumpur. “The country’s morale and resilience are being tested. How this is handled is reflective of the government’s resolve.”

Khazanah has less than a year to mastermind a debt relief solution for its 69.4 percent-owned airline. The carrier will run out of cash by June 2015 if operations don’t improve, or it doesn’t obtain new financing, Bloomberg data show.

Free cash flow has been negative since 2007, with the fastest cash burn happening in the last two years. The airline called for rights-share offerings in September 2007, February 2010 and May 2013, requiring Khazanah to cough up 4.8 billion ringgit to maintain its stake.

Economic Growth

“Cash burn in the second and third quarters of this year is expected to be higher because of the impact from MH370,” Daniel Wong, an aviation analyst in Kuala Lumpur at Hong Leong Investment Bank, said by phone July 23. It needs to cut unprofitable routes, sell non-core assets and trim staff costs, he said.

The airline’s woes are taking its toll on Prime Minister Najib Razak just as economists predict Malaysia is set to expand 5.3 percent this year from 4.7 percent in 2013 as exports recover. The central bank raised its policy rate on July 11 to 3.25 percent from 3 percent, the first increase in more than three years.

The ringgit has strengthened 0.93 percent in July to 3.1813 per U.S. dollar, headed for a third month of gains. Benchmark 10-year sovereign yields have declined 14 basis points to 3.891 percent and touched 3.870 percent on July 21, the least since Nov. 14.

The cost of insuring Malaysia’s sovereign debt against non-payment for five years using credit-default swaps has dropped 2.5 basis points this month and is down 26.8 basis points this year to 82.5, according to data provider CMA. The swaps reached a 13-month low of 80 basis points July 4.

Cost Cuts

The Malaysian government, which also guarantees 5.31 billion ringgit of Islamic bonds that have been used to help fund the carrier, will maintain its stake and a turnaround “cannot happen overnight,” Najib said last August. It won’t seek bankruptcy protection, the company said in May.

A fourth state cash injection will buy time for Malaysian Air to improve its business by reducing its fleet size and headcount, according to Jerry Lee, an analyst in Kuala Lumpur at RHB Research, a unit of the nation’s fourth-largest lender, RHB Capital.

The company could narrow its losses by 80 percent by 2015 if it trimmed 10 percent of its seat capacity, 20 percent of its staff costs and 10 percent of its operating costs, he said by phone yesterday.

“I would see any form of bankruptcy as very much the last resort,” Clifford Chance’s Hyde said. “Without a debtor friendly Chapter 11 protection like in the U.S., which many U.S. airlines have used to their advantage, a bankruptcy filing in Malaysia is fairly terminal.”

Before it's here, it's on the Bloomberg Terminal.