Among all the other measures that are in place to soften the blow by the COVID-19 crisis, the Commonwealth Government has also tweaked the bankruptcy laws to provide additional cushion while preventing businesses from going belly-up to some extent.
Adjustments to the existing bankruptcy laws, for individuals and businesses, became effective on 25 March 2020. It includes six-month temporary debt protection for people in financial hardship, which prevents recovery actions that could be initiated by unsecured creditors.
The debt threshold needed for creditors to apply for a bankruptcy notice has been increased to $20k from $5k. The Government has also made temporary changes to the duties of debt agreement administrators to change the debt agreement, which would be in place until September 2020.
Major factors that affect capital raising during uncertainties like COVID-19 include the future financial constraints of the business, macroeconomic conditions that impact the source of capital and amount of capital, and the existing equity holders of the business.
Let’s discuss the latest capital raising introduced by FLT.
Flight Centre Travel Group (ASX:FLT)
FLT has announced a comprehensive initiative package to exhibit resilience in its financial position. The package is designed to strengthen the balance sheet and liquidity position of the Company.
It was reported that the new response by the Company is consistent with its efforts to navigate through the COVID-19 crisis. Earlier, FLT had announced cost optimisation and cash preservation initiatives.
FLT has reported to launch a fully underwritten equity raising of around $700 million, which includes a placement and entitlement offer. As a result, the Company would issue approximately 97.2 million new shares.
Of the total, approximately $282 million is being raised through institutional investors and this fully underwritten raising is being offered at a price of $7.2 per share, meaning a discount of 27.3% to the last traded price of $9.91 on 19 March 2020.
Entitlement offers seek to raise $419 million equity with an offer of 1 for 1.74 shares. And, the offer is further segregated into two fully underwritten offers, under which institutional entitlement would see a raise of $280 million and retail entitlement would see a raise of $138 million.
Retail entitlement offer opens on 15 April 2020 and closes on 1 May 2020. Meanwhile, the Entitlement Offer of 1 for 1.74 shares would be available to the investors in records of the Company on 8 April 2020. And, all the new shares would be issued at a price of $7.20 per share.
Flight Centre noted that major shareholders have committed to subscribe for the pro-rata entitlement, which would have a pie of ~$25 million, with major shareholders including the Turners, Harris and James families.
Institutional Placement Completed
On 7 April 2020, the Company completed the institutional placement and the institutional component of its 1 for 1.74 accelerated pro rata non-renounceable entitlement offer, raising approximately $562 million.
Debt Restructuring & Cost Control
The Company has reported that the bankers of the business have agreed to provide additional funding of $200 million in bilateral term facilities. Also, the bankers have waived the covenant testing for the June 2020 and December 2020 testing periods in the existing as well as new facilities.
FLT now has $450 million in place from the bankers, which is subject to a minimum liquidity covenant of $350 million. The Company is progressing with cost optimisation plans to ensure survival through an extended period of uncertainty and disruption.
The cost saving plans would enable the business to deliver best services to the customers and capitalise of opportunities as conditions improve. It is expected to result in saving of $1.9 billion in annualised costs, meaning an anticipated monthly operating cash cost of around $65 million.
FLT said that one off costs of ~$210 million would be incurred to implement the cost saving plans, and further operating cash losses are expected to around $155 million during the transition period.
The Company had announced the closure of a large number of leisure shops across the world, and it expects to close over half of the global leisure shops, which includes more than 40% of the
Australian leisure shops.
It has progressed to reduce occupancy costs of the remaining retail shops significantly, which was done by negotiations with existing landlords. FLT said that the discussions had been positive with respect to cost savings, rent free periods and trading hours. It is also exploring the sale of Melbourne head office.
The Company has acknowledged policies introduced by the Government throughout geographies, allowing the businesses to retain employees and navigate through the COVID-19 crisis.
Domestically, it continues to engage with State Governments for policy initiatives that would help the business retain employees for the future. It also welcomed the JobKeeper initiative of the Government, which is being assessed by the Company. However, FLT believes that the policy would provide material support in retaining the employees and for payments to the employees.
Balance sheet position
The Company noted that the combination of capital, cost-saving plans, and liquidity would enable the business to have substantial liquidity and balance sheet flexibility amid the COVID-19 crisis.
COVID-19 Impact and Outlook
Heath measures introduced by the Government have posed unprecedented challenges to the travel industry. Being one of the largest leisure and corporate travel businesses, the Company has been impacted severely, and would continue to be impacted due to:
- Travel restrictions,
- Reduction in airline travel,
- Shutdowns imposed by the Governments,
- And, cautious consumers with respect to travelling.
FLT noted that the business was tracking record levels until February 2020. In March 2020, the global TTV fell severely by 20% to 30% from the normal levels as a result of measures introduced by the Governments to curb the spread of the virus. Consequently, the Company anticipated additional downside in the TTV, considering the current restrictions in place.
However, the business continues to generate cash flows through intra-state and inter-regional travel, repatriation services, essential services, government work, aircraft charters, long-term travel booking and alternative revenue streams.
The Company was able to retain corporate accounts and penned contracts with annual spending in the order of $250 million during March 2020. Also, it is well placed to capture the rebound in the travel industry.
On 7 April 2020, FLT was trading at $9.72, down by 1.91% from the previous close. (AEST 11:39 AM).
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