This article first appeared in The Edge Malaysia Weekly, on April 4 - 10, 2016.

LAST Friday, low-cost carrier AirAsia Bhd announced that its founders, Tan Sri Tony Fernandes and Datuk Kamarudin Meranun, plan to inject RM1.01 billion cash into the company in exchange for 559 million new shares valued at RM1.80 apiece, after adjusting for a dividend of four sen per share.

The issue price is at a small premium to the LCC’s last traded price of RM1.83.

The share issuance will raise the founders’ combined stake from 18.9% to 32.4% — slightly below the 33.3% threshold to make a mandatory general offer for the budget airline.

Fernandes is the group CEO and executive director of AirAsia while Kamarudin is the executive chairman of the group.

When contacted by The Edge, Fernandes says Kamarudin and he decided to “put our money where our mouth was” when the cost of euro medium term notes was “too high”.

“AirAsia is our baby and we have been hurt by analysts and lack of shareholder confidence, so we thought we would kill two birds with one stone, [by] raising needed money for AirAsia and show our commitment to our baby,” he replies via WhatsApp.

“I am not here to make predictions but let the results speak for themselves.”

According to Fernandes, many shareholders had been asking for his and Kamarudin’s long-term commitment, “to show the world what AirAsia is capable of”.

“They just got our commitment in no uncertain terms. We two are thrilled and re-energised to be back driving the AirAsia vision and proving our doubters wrong. We both love challenges. Talk is cheap, so let’s do it as another famous brand said,” he says.

In a filing with Bursa Malaysia, AirAsia reiterates that the share issuance is the most appropriate means of fundraising as the terms for its US$1 billion MTN programme, which was announced on Jan 6, 2016, were not favourable due to weak market sentiment.

“The proposed share issuance is expected to generate annual interest savings of about RM10.69 million, arising from the prepayment of bank borrowings,” the LCC explains.

While AirAsia has said that the share sale to Fernandes and Kamarudin is part of its plan to pare down debt, some quarters are wondering why the LCC did not opt for a different route, of making a cash call instead. A rights issue would have protected the minority shareholders from equity dilution.

A back-of-the-envelope calculation shows that theoretically, AirAsia could make a one-for-one rights issue of 2,782.9 million shares at a mere 36 sen per rights share to all existing shareholders to raise that RM1.01 billion fresh capital.

The outcome would be the same as the company can still meet its objective of raising RM1.01 billion to partially settle its debt. More importantly, there would be no equity dilution for the minority shareholders.

If the rights issue was set at 36 sen apiece — which represents a steep 80% discount to the stock’s closing of RM1.83 last Friday — it would provide all the shareholders of AirAsia with an opportunity to increase their equity participation at below market price.

From the company’s perspective, it is not that bad an idea to reward its shareholders with discounted rights shares.

Interestingly, AirAsia highlights that the proposed share issuance is a “comparatively efficient avenue” to raise the required quantum of funds as opposed to other forms of equity fundraising such as rights issues.

“... although it is a pro-rata issuance of securities to all shareholders, there is no certainty of successful completion and may require underwriting,” it says in a filing with Bursa.

“There is also no certainty in the successful completion of a proposed share placement, which is typically priced at a discount to market to encourage new investors to subscribe for it.”

However, certain quarters argue that in any case, Fernandes and Kamarudin could underwrite the rights issue to take up the unsubscribed portion.

But now, the minority shareholders have been denied the opportunity to subscribe for the new shares.

It is worth noting that the proposed share issuance is subject to the approval of AirAsia’s non-interested shareholders in an extraordinary general meeting to be convened later.

It will be interesting to see how the market reacts to the corporate exercise once trading in AirAsia’s shares resume on Monday.

To recap, AirAsia last Friday announced that it had signed a conditional subscription agreement with Fernandes and Kamarudin through Tune Live Sdn Bhd, a dormant company that is equally owned by the duo.

As at March 28, the duo had an 18.9% stake in AirAsia via another private vehicle, Tune Air Sdn Bhd.

Upon the completion of the proposed share issuance, Tune Live will hold 16.7% of the enlarged issued capital of AirAsia while Fernandes and Kamarudin will own 32.4%.

Explaining the rationale behind using Tune Live instead of Tune Air, Fernandes says it is because it is just he and Kamarudin who own Tune Live. “Because it is just me and Kamarudin. [Datuk Abdul] Aziz Bakar is in Tune Air,” he says, adding that Tune Live has not finalised whether to finance the subscription through banking facilities or shareholders’ personal capacity.

“Confidential, both I suppose,” he briefly answers.

AirAsia says 34% of the raised proceeds will be used to prepay its unsecured term loan facilities and repay its unsecured revolving credit. This is expected to reduce its gearing from 2.79 times now to 2.22 times post-exercise.

About 27% of the money will be spent on funding aircraft, spare engines and other aircraft parts and another 28% on general corporate and working capital.

About 10% of the funds will be used to partially fund the construction of its new headquarters at klia2, which is scheduled to be completed this year.

Should the minority shareholders be happy to see the controlling shareholders inject such a big sum into the company or should they raise questions about the choice of fundraising option? 

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