With that, we'll take your questions.
Thank you, Martin. I will now hand over to our moderators to begin the Q&A session.
Okay. The first question comes from Andrew Lee of Jefferies. There are a few parts for the question. First part is: When does the preference shares expire?
The preference shares are perpetual. The preference shares don't expire until we've redeemed them. Obviously, it has a step-up. As we said, the first three years is at 3%, 5%, 7%, 9%. We can defer that coupon as well in terms of preserving cash. Obviously, as the government mentioned today, they're not expected to be a long-term investor. We certainly would be expecting to repay that over a three to five-year period.
Okay. Second part. For the bridging loan, are planes used as collateral?
There's some security, partial security on the bridging loan, over our current unencumbered aircraft, which has now provided security for that loan.
Okay. The third part. The total of the three proposals is HKD 40.9 billion, which is higher than the announced HKD 39 billion. What's the difference?
It was $5 billion US, translated at 7.8. It depends what exchange rate you've used, I guess.
Also, is that 40.9 compared to 39? I think that's the warrants, right?
That's to put immediate value on the warrant.
Right. Okay.
Oh, sorry, the what?
of this question. Sorry.
Yeah, they must have allocated the value to the warrant.
Yeah. Final part of this question. HKD 20.7 billion short-term for this year. Will this all be paid this year?
Sorry, can you repeat the question?
20.7 HKD 20.7 billion short-term for this year. Will this all be paid this year? Short-term loan, right?
Are you talking about I believe they're talking about our refinancing for 2020?
Yeah.
Yeah. Again, in our annual report, it talks about our HKD 20 billion or so refinancing in 2020, and that certainly we'll use some of that liquidity to repay that, and also will be some refinancing.
Okay. Next question comes from Ben Hartwright of Goldman Sachs. He has got a few questions. The first part is: What will likely determine whether the government exercise its warrants?
Well, obviously, the share price itself. They can exercise those warrants any time over the five-year period. Again, that's their determination depending on the share price at the time.
Second part, also from Ben. About the Hong Kong Government, the two observer seats. What do you expect will be the impact on management and the decisions you can take with regards to such observers?
I think that was well documented in both the Financial Secretary's and our Cathay Pacific press statement in that there is no intent from the Hong Kong government to interfere with either the operations or management of the business. It does give them full visibility of their investment, full documentation of that, and a right to comment on their investment.
The next question, also from Ben, is: What is your current assumption for the time it will take to recover back to the demand levels in the first half of 2019?
Want me to take that?
Sure.
Okay.
Well, currently, the situation is still very fluid, it is very difficult to predict. According to IATA, their forecast is that it's only by 2023 traffic demand will resume to pre-COVID-19 level. Currently, for Cathay, we'll spend the next few months to gather more information before we take a view on this pace of the recovery and the medium-term outlook. At the moment, we don't have any accurate outlook that we can share.
Okay. Thank you. Next question comes from Kelvin Lau of Daiwa Capital. Two parts. The first part is: Why do you prefer to have government's involvement in this restructure plan? The benefits as compared to the support from your major shareholder?
As we mentioned, we're grateful for support of both government and our major shareholders. I think it's a vote of confidence in Hong Kong as an aviation hub, from all. In terms of why we sought government support, again, that was well documented and said at both press conferences in terms of what's happened on the impact of COVID-19 around the region, the uncertainty of the future for the aviation sector, and how governments around the world have had to step in and support what is a key sector to overall industry.
Second part of the question from Kelvin: If the public rights issue is not fully subscribed, would the major shareholders take on pro rata basis?
The major stakeholders have all irrevocable undertaking to sign up. It's a 15% free float, which has been underwritten by four strong relationship banks.
Okay. Final part from Kelvin: what is the interest cost now, or how is it compared to the raised offer on the preferential shares?
What is our
Yes.
Well, again, they're all different instruments. The instruments have all been done on a commercial basis. If we take Tranche C in terms of the loan, LIBOR plus 1.5% for 18 months is certainly a level that we would've had pre-COVID-19, if not lower. That's very much on commercial base for that length of tenor. In terms of a perpetual bond, I think the coupon rate is fair in terms of the step up there. In terms of the warrant then, we strive to have a return on capital invested, ROCE, of 7.5% and hope to achieve that.
Okay. Thank you. The next question comes from Rebecca Law of Credit Suisse. Three parts. The first part is, the company is taking more passenger flights for cargo. What is the revenue and earnings contribution for the cargo segment now?
Well, with the passenger revenue falling to only 1% to the normal level, basically majority of revenue predominantly comes from cargo nowadays. We have done a lot to improve our cargo revenue. Apart from running the freighters with higher utilization, we have mounted many passenger flights to carry cargo only. For example, in the month of May, we have mounted close to 900 pairs of passenger flights to carry cargo only.
Right. The second part of the question is: we understand the hedging loss will be $7 million for every $5 dropped in oil price. Could you remind us any updates on hedging loss now?
Well, that was well remembered. It doesn't change. All we're saying there is for the hedging losses, it's all very public, so our hedging position, we've hedged it for the rest of the year at $65. You have to work out what your own view of what the future's going to be in terms of the Brent price. If you assume $40, for every $5 decrease, that difference would be $25. With $7 million per month for every $5, you're talking about just over HKD 250 million per month hedging losses. Obviously at the moment, while we're not flying, we don't get the more than offsetting benefit of the cheap fuel.
Final part of the question from Rebecca. Given the rights shares issuance price is at HKD 4.68, which is 35% discount to TERP, how do you think about short-term market performance?
Obviously, as Ronald mentioned, the immediate short term is very uncertain. We don't know when international travel restrictions will lift. Ronald also mentioned what the IATA outlook was, we are expecting a difficult 2021 at this stage. We will come back to the board in the fourth quarter in terms of what we think the optimal size of the group should be at that time. Again, the target remains to get our return on investment back up above our hurdle rate of 7.5%, we remain very bullish about the medium-term outlook for Hong Kong as an aviation hub.
Okay. The next question comes from K. Ajith of UOB. Will the preference shares be treated as equity or debt?
While it's like a perpetual bond in structure, the beauty of the preference A shares, it is treated as equity. 80% of the recapitalization is treated as equity, and that's what brings our gearing levels down, and that's what opens the capital markets up for further equity and debt lending.
Okay. There's another question from Kom of UOB, and also a few similar questions from other analysts about fleet. The question is: has Cathay managed to defer deliveries in 2020? Would you be able to quantify the expected deliveries for 2020?
Well, our original budget plan, has planned for 17 aircraft to be delivered in 2020. Some aircraft had already been delivered earlier this year. For the remainder of them, we are working with the aircraft manufacturer to try to delay them as much as possible, and some of them into 2021 at least. Given that some of the aircraft are already manufactured, so I think we are still talking to the aircraft manufacturer to see what degree of deferral we can manage to agree on for the rest of 2020. We're still working on it.
Okay. Next question comes from Eric Lin of the UBS. Aircraft delivery part has been answered, and future hedging part has been answered. The third part of the question is: have your cash flow in May and June improved or deteriorated versus the first four months of the year?
We're operating a skeleton crew, the cash flow has started to stabilize. Of the HKD 2.5 billion to HKD 3 billion that we've seen since February, the big part of that is salaries, a big part of that is the financing of the aircraft and then maintenance of the aircraft. You can add to that what we just talked about in terms of the hedging losses. There's a big chunk of working capital movement, which is the refunds that we've had to pay in the first period. We do expect the cash burn to come down in the second half, if we maintain a skeleton crew just because the refunds have been repaid.
Okay. I think we will have time for two more questions. Actually, follow-up questions from Ben of Goldman Sachs. Technical questions on the EGM vote. Can Air China vote for the rights issue?
Yes.
Yes. Okay. The second one, contingencies. Do you see any risk to completing the transactions laid out here? Any of the conditions precedent that might be uncertain?
No, we've had irrevocable undertaking from all the stakeholders, the government support has got no conditions attached. We've got
Okay. I think most of the other questions are repeating, so you have answered already.
Yep. Thank you very much for your questions. Kindly note that the slides from today's presentation will also be made available to download on our investor relations website later this evening. If you have any further questions, please write to us at ir@cathaypacific.com and we will endeavor to respond to them as soon as possible. This concludes today's analyst webcast. Thank you for joining us.
Thank you.
Thank you.