(Yicai Global) June 10 -- Hong Kong is investing HKD27.3 billion (USD3.5 billion) to support Cathay Pacific Airway’s HKD39 billion restructuring plan to cement the special administrative region's status as an international aviation hub and aid Hong Kong’s long-term development, not for ownership purposes, an official said.

The intention is not to hold these shares for the long term, and it will refrain from any part in the carrier’s daily operations, Hong Kong Financial Secretary Chen Maobo said at a news conference yesterday. The airline’s main shareholders Swire Pacific, Air China and Qatar Airways will have to roll over as the SAR may wrest as much as a 6 percent stake in the beleaguered air carrier nosediving amid the Covid-19 downdrafts.

Cathay's [HKG:0293] share price was up 2.04 percent in mid-morning at HKD9 (USD1.16) on the news.

The Covid-19 pandemic has hit the world aviation industry like never before. Global tourism and business travel have almost ceased, and the aviation sector has been in the deep freeze over the past few months, Chen added. Cathay, which transports 57 percent of passengers and 41 percent of cargo at Hong Kong International Airport, accordingly faces serious challenges in operations and finance.

Faced with this extraordinary state of temporary market failure, the airline and its major shareholders sought support from the SAR Government and reached this investment arrangement, Chen stated.

Taking Two Seats

The government will name two observers to sit on Cathay’s board to protect Hong Kong's investment until the company pays all loans and interest and redeems all preferred shares, Chen added.

The board proposed a capital reorganization plan with about HKD39 billion funding. The government will invest HKD27.3 billion of this. The firm will use 70 percent -- HKD19.5 billion -- to buy its own preferred shares, and the remaining HKD7.8 billion for transitional loans. Cathay’s top three shareholders have also pledged to purchase 2.5 billion shares in a rights issue for HKD4.68 per.

The government will use capital from the exchange fund portfolio of its land fund for the investment. The return on this outlay may reach 4 percent to 7.5 percent, according to an external financial consultant. This return is higher than the 3.7 percent average return on the land fund's investment in the exchange fund portfolio over the past six years and is thus in accord with the land fund's goal of a reasonable return, Chen added.

A rights issue is an offer to a company's current stockholders to buy new shares. This gives these shareholders securities called rights that allow purchase of the new shares at under market price on a set future date.

Editor: Ben Armour