Today I decided to sell my Air New Zealand (AIR) shares, not because I wanted to (I’m concerned that the IRD will mark me as a trader, instead of an investor for this), but because I felt forced to do so.
I originally bought my AIR shares because I saw them as a healthy dividend paying stock and thought they would sit nicely in my retirement portfolio with an uncomplicated, regular, not inadequate (above the value of inflation) dividend income. I also liked that as the nations flag carrier, with the government as the majority shareholder, there was some degree of protection in that. Boy was I wrong, as just 6 months after my purchase, the company is in a very different situation.
Why Did I Feel Forced To Sell My AIR Shares?
So, why did I sell my AIR shares, but not my other underperforming shares (such as AIA)? In short, one of the very reasons I bought AIR had fundamentally changed. Having the government as a majority shareholder went from being a benefit to a significant risk.
Since the government shut down travel by AIR (pun / dual meaning intended), Air New Zealand has obviously been struggling to the point where they’ve had to look at financing options. Here’s where it gets shady, and why I sold.
Like a number of private companies I own, the company has been offered (or possibly forced, given that the govt own 52% of the shares – I’ve not looked into the governance structure, to be sure of the influence) a loan from the government. This sounds nice of them to help out after they stopped the company operating, until you hear the terms of the interest rate they’re being charged – between 6% and 7% for the first $600m and 9% for the remaining $300m, of a total $900m loan. This will be hard to pay back, but that’s ok because the contract gives the option to convert the loan into equity.
This presents the risk a massive conflict of interest, in my opinion. After taking such an expensive loan, if AIR are unable to repay, the share price will be in a very bad position, which makes me wonder how much of the company could then be converted into equity to be owned by the government to cover the loan. Being the majority shareholder, I feel as though the govt could be (again, I don’t know much about the governance on the board of directors) in the position to block to other forms of fundraising (such as a capital raise) , damaging the company in order to serve their own interests to gain a larger shareholding. After going straight to an ~8% loan facility (rather than cheaper bonds or a capital raise, which would be more in the interest of other holders), I feel as though my minority shareholder interests are against the govt’s interests, and that the govt is using this to extract money from Air New Zealand.
It’s disappointing to have to exit my position, as I would have rather have had the opportunity to consider my position in a capital raise, and waited to see how the company performed in a couple of years in keeping with my investor strategy.
Anyone considering whether they should sell their shares may wish to research more about the governance of Air NZ, specifically how much influence the govt has over the board. They may also wish to look at the likelihood and scale of future capital raising (which decreases the value of your holding), and form their own opinion about the likely return to a successful position. Personally for me, I couldn’t see an easy way to be sure that the governance in the company represented my interests, or more specifically, wasn’t against my interests. Given this risk, the fact that the fundamental purpose for holding the stock was no longer valid, and the future risks to the business and my holding, I felt compelled to sell.