LCQ11: Cathay Pacific Airways' deferrals of payment of preference share dividends
It has been reported that Cathay Pacific Airways Limited (Cathay Pacific), which received an injection of $27.3 billion of public money from the Government on the grounds of "maintaining Hong Kong's status as an international aviation hub" in June 2020, has announced its fifth deferral of payment of preference share dividends to the Government, and the cumulative amount of dividends in arrears has totalled $1.46 billion. Meanwhile, Cathay Pacific has also expressly pointed out that there has been no timetable for repaying debts to the Government. Some members of the public have criticised that for members of the general public who default on bank repayments, not only will claims be filed against them in court, but their future credit scores will also be affected. However, while the authorities had lent tens of billions of dollars of public money from taxpayers to Cathay Pacific on behalf of all members of the public in Hong Kong, Cathay Pacific "repaid neither the principal nor interest" in the past three years, which is an unreasonable practice. In this connection, will the Government inform this Council:
(1) as Cathay Pacific has claimed that it has not set a timetable for the redemption of preference shares from the Government and the repayment of relevant debts to the Government, of the reasons why the deadline for redemption of preference shares and the repayment dates for relevant debts were not specified when the authorities entered into an agreement on the recapitalisation plan with Cathay Pacific;
(2) whether it has set a repayment deadline and a minimum repayment amount for the arrears arising from Cathay Pacific's deferrals of payment of preference share dividends, as well as interest and penalties for deferrals of repayment; if so, of the details; if not, the reasons for that;
(3) some members of the public have suggested that the authorities consider making reference to the practice of the Mainland where the businessmen of private real estate enterprises are required to use their private properties for debt repayment when the relevant enterprises fail to repay debts, and requiring the controlling shareholder which holds more than 40 per cent of the shares of Cathay Pacific (i.e. Swire Pacific Limited, which owns quite a number of commercial buildings and assets in Hong Kong) to pay dividends on behalf of its subsidiary, so as to be accountable to all taxpayers in Hong Kong, whether the authorities will accept the aforesaid suggestion; if so, of the details; if not, the reasons for that; and
(4) whether it will draw reference from the existing mechanism under which the MTR Corporation Limited is required to pay fines for service disruption incidents as a rebate to passengers, and study requiring Cathay Pacific to rebate a certain percentage of fares or offer concessions to Hong Kong permanent residents travelling on its flights as one of the conditions for deferring the payment of dividends?
In consultation with the Hong Kong Monetary Authority and the Transport and Logistics Bureau, I have prepared a consolidated reply to the question raised by the Hon Paul Tse as follows:
(1), (2) and (3) The local aviation industry is under severe stress in the face of the COVID-19 pandemic. As the Cathay Pacific Airways Limited (Cathay Group) plays a key role in the aviation industry of Hong Kong, the Government decided on June 9, 2020 to invest in the Cathay Group through the Land Fund and support the local aviation industry during this difficult time, so that the Group can continue to contribute to the development of Hong Kong as an international aviation hub as well as the overall economic development. The investment comprises buying preference shares (with detachable warrants) of around $19.5 billion and providing a bridge loan of around $7.8 billion.
Under the investment agreement, the Cathay Group shall pay dividends to the Government, the holder of the preference shares, every six months at a step-up rate until the redemption of all preference shares. The dividend rate per annum is three per cent for the first three years, five per cent for year four, seven per cent for year five, and nine per cent for the remaining years. Any delay by the Cathay Group in redeeming the preference shares from the Government would result in a gradual increase in the financing costs of the company. This arrangement is aimed at encouraging the Cathay Group to redeem the preference shares at the earliest possible time having regard to its business and operational considerations. The agreement further provided that the Cathay Group may at its discretion defer the payment of the preference share dividends. That said, any dividends in arrears shall be entitled to additional dividends at the prevailing dividend rate, and the Group shall be ultimately responsible for paying all dividends, including the additional dividends, to the Government. During the deferral of dividend payable on the preference shares, the Cathay Group shall not distribute dividends on its ordinary shares.
The Government's bridge loan to the Cathay Group is provided at the interest rate of HIBOR plus 1.5 per cent. The Cathay Group may arrange phased drawdowns within the drawdown period based on its cash flow requirements and is required to make repayment within 18 months of the respective drawdowns. The Group shall have to repay the loan and all interest before the expiry of the loan period. As of today, the Cathay Group has yet to drawdown the bridge loan. We believe the above arrangement has struck a balance between safeguarding the government's interests and giving support to the Cathay Group.
As Hong Kong reconnects with different parts of the world and resumes normal passenger travel to and from the Mainland, market demand for air services in and out of Hong Kong is gradually picking up. The businesses of the aviation industry in Hong Kong, including that of the Cathay Group, are recovering in an orderly manner. As of the end of January 2023, the passenger throughput and the number of passenger flights of the Hong Kong International Airport already returned to around 35 per cent of the pre-pandemic levels. As announced by Cathay Group earlier, it estimated that it would be operating at about 70 per cent of pre-pandemic passenger flight capacity by the end of 2023, with the aim of returning to pre-pandemic levels by the end of 2024. The Government will continue to facilitate local airlines and the aviation industry to be back on track through different means, with a view to upholding and enhancing Hong Kong's status as an international aviation hub, and providing impetus for the recovery of the Hong Kong's overall economy. Right now, the Government has no intention of setting further financial constraints that may slow down the revival of the aviation industry.
(4) The Government has no intention of becoming a long-term shareholder of the Cathay Group or participating in its daily operation. The daily operation of the Group, including the ticket pricing of its airlines, is still in the hands of its board of directors and management, who will make decisions based on business and operational considerations.
Ends/Wednesday, February 22, 2023
Issued at HKT 14:20
Issued at HKT 14:20