HK forecasts 7.5pc net return from HK$27.3b Cathay Pacific investment

The Hong Kong  government forecasts a net return of 4 percent to 7.5 percent from its HK$27.3 billion investment in Cathay Pacific Group through the multi-billion-dollar Land Fund, the Financial Secretary Paul Chan Mo-po said today.

He said that based on the assessment of the external financial consultant of the Hong Kong Monetary Authority, "the projected return of this investment in terms of internal rate of return is expected to range from 4 percent to 7.5 percent, higher than the six-year moving average of 3.7 percent of the investment portfolio of the Exchange Fund.''

Chan said the government does not intend to hold the investment long-term.

He made the remarks just hours after British conglomerate Swire Pacific, which holds 45 percent of Cathay Pacific, announced a HK$38.9 billion recapitalization plan to strengthen the airline's balance sheet.

Chan said the government aims to generate a "reasonable'' return from the investment. It also aims to help protect Hong Kong's role as a leading international aviation hub in the region as well as the long-term overall economic development of Hong Kong, 

As a global aviation hub, Hong Kong's  international air network supports a range of economic activities, "notably trading and logistic, financial services, and tourism,'' Chan said. 

He said that if the unprecedented operational and financial challenges of Cathay Pacific are not  addressed, that could  harm Hong Kong's status as an international aviation hub "and adversely impact on other economic activities to the detriment of the overall interest of Hong Kong.''

He said government's investment is about HK$27.3 billion. This is made up of  preference shares with detachable warrant of around HK$19.5 billion and a bridging loan of around HK$7.8 billion.

Cathay Pacific Group will also make a HK$11.7 billion rights issue of shares to existing shareholders, Chan said.

He said the  government will appoint two observers to the Cathay Group board until Cathay  redeems all preference shares from the government, and repays in full the bridging loan with  interest.

Chan said the investment decision took into account the advice of the Secretary for Transport Frank Chan;  the Secretary for Financial Services and the Treasury, Christopher Hui, as well as the commercial advice of the Hong Kong Monetary Authority and its external consultant. 

He also cited support given by other countries to their airlines.

France has offered relief of about HK$60 billion in loans and credit guarantee, and Germany, has provided about HK$77 billion in the form of ordinary shares, grant and loans, while Singapore offered support of about HK$104 billion in the form of ordinary shares, convertible notes and loans.

The Land Fund, which is counted in the fiscal reserves. has HK$219.73 billion based on the 2019-20 revised estimate presented in the February budget.