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UPDATE 3-Air New Zealand to draw on government loan after first annual loss in 18 years

* Underlying pre-tax loss of NZ$87 mln better than guidance

* Airline has cut 30% of staff due to pandemic

* NZ$900 mln government loan has interest rates of 7-9% (Recasts and updates throughout with executive interviews and government loan)

SYDNEY, Aug 27 (Reuters) - Air New Zealand Ltd plans to draw on a NZ$900 million ($596.34 million) government loan within days to help it weather the coronavirus pandemic after reporting its first annual loss in almost two decades.

The funding injection will provide some much needed liquidity as the airline burns through cash, but it will come at a cost. Along with interest rates of 7-9%, the loan gives the government the right to seek repayment through a capital raising after six months or convert the loan to equity.

“It was always intended as a short-term funding arrangement,” Chief Financial Officer Jeff McDowall told Reuters in an interview. “It is not cheap because it is short term.”

The loan also gives the government security over many of Air New Zealand’s aircraft, complicating its ability to get commercial funding until the loan is retired, McDowall said.

The carrier forecast another loss this fiscal year as it reported an underlying pretax loss of NZ$87 million in the 12 months ended June 30, compared with a NZ$387 million profit a year earlier.

Stronger-than-expected domestic demand and increased cargo flying helped it beat a NZ$120 million loss the company had forecast in June. But the bottom-line figure blew out to a NZ$454 million loss, driven by aircraft impairments and restructuring charges.

Air New Zealand has cut around 30% of its workforce and grounded most of its long-haul fleet in an effort to reduce cash burn amid international travel restrictions.

The domestic market had recovered to 70% of normal levels in July when New Zealand stamped out local transmission of the coronavirus, but a fresh outbreak in Auckland earlier this month brought renewed travel restrictions that forced the airline to both cut capacity and comply with social distancing rules on its planes.

If those domestic restrictions are lifted, the airline said it could reduce its cash burn to NZ$65-85 million per month, down from NZ$108 million in August.

“We are hopeful we can get back to running a more sustainable operation without social distancing,” Chief Executive Greg Foran told Reuters.

Under social distancing, the airline can sell only two-thirds of the seats on its jets and half the seats on its turboprops.

Foran said talks with the government about the capital restructure were ongoing, declining to comment on whether a delayed Oct. 17 national election was a factor in the timing of a decision.

The government currently has a 52% “hands-off” stake in the airline, a remnant of a 2002 bailout that followed a failed tie-up with Ansett Australia and the fallout from the U.S. Sept. 11 attacks.

Rivals Qantas Airways Ltd and Singapore Airlines Ltd have raised equity in addition to taking out debt facilities secured over aircraft. ($1 = 1.5092 New Zealand dollars) (Reporting by Jamie Freed in Sydney; additional reporting by A K Pranav in Bengaluru; Editing by Shinjini Ganguli and Jane Wardell)

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