Question

Due to the Pandemic of COVID19 and lockdown procedures across the globe, the economic cycle have been slowing down sharply, and a severe lack of financing sources is being faced at both governments and corporations’ levels. Aviation industries are one of the major industries to be harmed by the consequences of this pandemic. What would be your expectations regarding the changes in their capital structure, and what are the possible solutions available for them to compensate for the lack of debt financing?       

Answer 1

As the revenues and profits of the aviation industry has been hugely impacted and the ability to pay debt obligations has also been adversely affected. It is advisable that they do not raise debt as inability to pay debt can lead to bankruptcy and insolvency for these companies. They can sell some assets to raise money as they might of lackibg on the retained earnings as well since they might have been thriving on that during the lockout period. The capital structure financing would constitute lower debt than before and there would be a greater dependance on equity. So, the weighted average cost of capital shall also rise and it would also lead to equity dilution.