The airline Norwegian took a massive step towards survival today with a key vote at a company EGM. Shareholders overwhelmingly voted to dilute their own shareholding in a debt-to-equity restructuring package.
According to NRK, shareholders voted 96.47% in favour of a capital issue where current shareholders have preferred allocation. 95.47% supported the conversion of bond debt into shares, while 95.32% supported the conversion of leasing debt into shares.
The positive outcome is a massive positive step forward for Norwegian, which has been in crisis mode for several months. Had the votes gone the other way, the company would almost certainly have faced bankruptcy.
Chairman Niels Smedegaard said it was a historic day, while Norwegian's CEO Jacob Schram called the result a great relief, but urged caution: “There is still a lot of work ahead of us. This is where we are going to take it from strategy to implementation.”
Restructuring for survival
The airline desired to get rid of around 10.8 billion Norwegian kroner of debt by giving bondholders and leasing companies new shares in the company. During the meeting, Norwegian announced that shareholders would retain 5.2% of the company prior to the conversion of bond and lease debt. Converted debt will equal 94.8% of the shares in the company.
The aim of the comprehensive restructuring was to convert debt into shares so that Norwegian meets the requirements to access the bulk of the Norwegian government's airline crisis package.
Now the airline believes they can access the government loan guarantees worth 3 billion Norwegian krone ($290 million) package of loan guarantees that will save the company from bankruptcy – for now. The guarantees are “crucial to getting through the crisis,” according to Schram.
Putting together the pieces of the puzzle
On Thursday, the airline's future looked bleak as owners of one four bonds turned down a crucial part of the proposed debt-to-equity swap.
However, talks continued over the weekend and Norwegian CEO Jacob Schram announced on Sunday that an agreement had been reached. That being said, a second vote still needs to take place, which is now scheduled for May 18.
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On the morning of the EGM, Norwegian confirmed a critical agreement had been reached with leasing companies, which own a considerable proportion of Norwegian's fleet of Boeing aircraft.
Small shareholders relented
Shares in the airline are down 86% this year. They were suspended until the outcome of the shareholder meeting was known.
Big investment funds and investment firms have long since dumped their Norwegian stock as the price plummeted. The owners today mostly consist of many small shareholders along with Norwegian government investment arm Folketrygdfondet.
The small shareholders had been divided, until intervention by co-founder and former CEO Bjørn Kjos. A significant group had wanted direct state support in the form of a 10 billion Norwegian kroner cash injection, which would make Norway a majority owner. Following dialogue with Kjos, the shareholders decided to support the airline's proposed package.
“They really only have two choices. Either vote for it to continue with a new structure and balance for a smaller company with fewer aircraft. Or vote no, and then it goes bankrupt,” said Nordnet investment economist Mads Johannesen prior to the vote.
What's next for Norwegian?
While the EGM votes are a positive step, the airline is by no means safe. It still has to negotiate a second bondholders vote, and then access the loans that will be unwritten by the Norwegian government. Should that all succeed, the airline will look very different.
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The company believes the difficult situation facing the aviation industry will persist for a long time. As such, Norwegian plans a “hibernation phase” until the winter of 2020/21. During this time, Norwegian's present low activity will continue, based on the support offered by the Norwegian authorities to maintain a minimum offer of air travel.
During 2021, the company will step up operations, but a flight network resembling “normal operations” will not be resumed until 2022.
As a result of this strategy, the airline also announced a significant change in fleet size. Norwegian currently has around 168 Boeing aircraft, but that number will be reduced to between 110 and 120.