Air New Zealand shares drop as investors assess $2.2 billion financial rebuild

Air New Zealand has brought back a Boeing 777 aircraft for freight services. Photo / Supplied

Air New Zealand shares dropped nearly 6.5 per cent down to $1.28 earlier this morning as investors digested the implications of the airline's plans to raise $2.2 billion in equity and debt.

From next week Air New Zealand starts the process to issue more than two billion new shares. Under the two for one rights offer existing shareholders can buy shares for 53c each.

When you add this new capital to the current value of all the shares in the company and divide that by the total number of shares that will be on issue the share price lands at 81c. This is known as theoretical ex-rights price or Terp and the airline has said it expects a share price reset.

Greg Smith, head of retail at Devon Funds, said he wouldn't expect the share price to fall towards that level until the rights offer opens next week.

Most shareholders would be assessing the details of Air NZ's offer and the substantial discount to buy more would be attractive.

Aside from the implications of the rights offer for the share price, the airline faces headwinds, said Smith, with rising oil prices a big obstacle.

Oil prices had moderated from recent highs but had risen overnight and was a substantial cost to the airline.

The stock is popular with Sharesies investors and the firm today said it couldn't offer any financial advice on whether or not an investor should take part in any offer.

''We do, however, aim to educate about corporate actions such as a rights offer and we are doing as much as we can throughout the offer period to ensure those who want to exercise their rights to buy more Air NZ shares at the deep discount can do so.''

Air New Zealand closed at $1.38 before the recapitalisation announcement was made and has averaged around $1.50 so far this year. It touched 80c in March 2020 as the pandemic hit.

The capital raise has been pitched largely in line with expectations but the market may struggle with its sheer size, Salt Funds managing director Matt Goodson said.

He said that the 53c offer price was a touch below expectations of one or two people "but we thought it was pitched about right".

"In terms of the forecasts, they line up with what we were thinking but, as always, airlines have massive operational and financial leverage, so very small changes can make a big difference to the bottom line," he said.

In terms of the likely market reaction: "It's just a question of whether the sheer size of this offer causes the share price to fall or not."

The funds will be used to pay back $850 million of an existing Crown loan and provide $950m for the airline to rebuild its pandemic-ravaged international network and for continued growth of its domestic operations and other parts of its business, including its loyalty scheme.

The undrawn $400m new Crown loan will be used as backup should it be needed before 2026.

The airline said last night its pre-tax loss for the full financial year would be less than $800m, not in excess of it.

Jarden analysts forecast losses to fall to $791m from $809m. Forecasts for the 2023 and 2024 financial years are a loss of $54m and a profit of $171m.

The airline says it did not expect to pay a dividend before 2026.