US bankruptcy court greenlights PAL’s loan financing

Philippine Airlines (PR, Manila Ninoy Aquino Int’l) has announced it has won US court approval to access financing for its Chapter 11 bankruptcy proceedings, the first step to pare off USD2.1 billion of the flag carrier’s USD6 billion debts.

Justice Shelley Chapman of the US Bankruptcy Court in the Southern District of New York, on September 9, granted an order that allows Philippine Airlines to draw up to USD20 million from a USD505 million loan facility led by the carrier’s controlling shareholder, Buona Sorte Holdings Inc., which is owned by the family of tycoon Lucio Tan.

The judge approved all “First Day” motions on an interim or final basis for Philippine Airlines’ voluntary restructuring. This follows after the airline on September 3 had filed a voluntary petition for relief under Chapter 11 of the US Bankruptcy Code, which will allow it to restructure and reorganise its finances impacted by the COVID-19 crisis.

“These approvals mark an important step forward in Philippine Airlines’ recovery plan, which will reduce the company’s debt by USD2 billion and help [it] recover from the impact of the global pandemic,” the airline said in a statement. “This is a significant step in our recovery plan and supports our ongoing operations,” added president and chief executive Gilbert F. Santa Maria. “The combination of our substantial creditor support and the court’s approvals enables us to progress toward an expedited emergence and full recovery,” he said.

Amongst the “First Day Motions” passed, the court granted an order confirming Philippine Airlines’ authority to continue to operate its business in the ordinary course. It also authorised Philippine Airlines to continue paying ongoing suppliers and trade creditors in the ordinary course for goods and services delivered throughout the Chapter 11 process. The court also passed an interim order authorising, but not directing, Philippine Airlines to pay certain employee wages and other compensation and to maintain employee benefits and authorised all applicable banks to honour all related transactions.

Philippine Airlines will further honour and maintain all customer programmes, including valid tickets and travel vouchers, Mabuhay Miles and benefits, and refund obligations, subject to Philippine Airlines’s usual terms and conditions of use.

The proposed restructuring plan filed in the Southern District of New York will allow the airline to:

reduce its aircraft-related obligations by USD2.1 billion;
obtain a USD505 million infusion of working capital to fund its ongoing operations during Chapter 11;
optimise its fleet size, composition, and ownership costs as required by the new market conditions;
maintain and enhance its key contracts and business partners to strengthen its viability during the pandemic and beyond; and
obtain USD150 million in debt financing from new investors to ensure that it has adequate liquidity and runway to complete its restructuring.
The airline hopes to exit the Chapter 11 process before the end of the year. PAL Holdings, the listed holding company of Philippine Airlines, and PAL Express (2P, Manila Ninoy Aquino Int’l), are not included in the Chapter 11 filing.

According to documents before the court, the airline owes USD2 billion to aircraft lessors alone. The 20 biggest creditors are:

Nanshi Aviation Leasing Limited/ Goshawk: USD271 million;
CIT Group (Ireland): USD244.2 million;
SMBC Aviation Capital (UK): USD240.8 million;
Aviation Pacific Leasing II PTE LTD: USD125.7 million;
Pajun Aviation Leasing 3 Limited: USD 118.9 million;
Pajun Aviation Leasing 1 Limited: USD118.8 million;
Pajun Aviation Leasing 2 Limited: USD118.5 million;
Rolls-Royce: USD89 million;
Philippine National Bank: USD86.8 million;
Lufthansa Technik Philippines INC: USD80.7 million;
Asia United Bank: USD75 million;
GECAS: USD74 million;
SAF Leasing II (AOE 2) Limited: USD66.5 million;
China Banking Corporation: USD65 million;
Avolon Aerospace AOE 95 Limited: USD63.3 million;
CIT Aerospace International: USD61.2 million;
DCAL II Leasing Limited: USD55.7 million;
Falcon 2019-1 Aircraft 1 Limited: USD55.6 million;
JPA No. 112 Co. Ltd: USD53.9 million; and
ECAF I: USD51.9 million.
After having been a leading player in the Philippine airline market with about 4,500 employees and more than USD3 billion in annual gross revenue prior to COVID-19, Philippine Airlines lost USD2 billion in revenues after pandemic travel restrictions crippled the airline industry.

The carrier undertook a number of cost-cutting measures, including slashing its workforce by 32% and began discussions with stakeholders which culminated in several restructuring support agreements (RSAs) with its aircraft lessors and lenders outlining the material terms for the proposed Chapter 11 plan of reorganisation.

Meanwhile, the Daily Tribune reports that the Philippine government this week said it would await the outcome of Philippine Airlines’ US bankruptcy proceedings before allowing local state-run banks to assist the airline.

“I do not want the LandBank (of the Philippines) and DBP (Development Bank of the Philippines) to go in and finance a company that is filing for bankruptcy and we don’t know how it will turn out yet,” Finance Secretary Carlos Dominguez III told a virtual hearing of the government’s Development Budget Coordination Committee’s on the 2022 fiscal year budget on September 9. “(Philippine Airlines) took a different path of filing for bankruptcy first. So I told them, the conditions I said before are still on the table, however, if you will file for bankruptcy, we will have to wait for the outcome of the bankruptcy proceedings,” Dominguez said.

The Finance Minister noted his ministry had started discussions with the airline industry in March 2020. A team from the Department of Finance (DoF) and state-run banks was formed to provide assistance to airlines. “I set out the principles of our participation from the very beginning…we do not want to end up owning any airline… and frankly, the history of Philippine Airlines under the government administrations in the past has been dismal,” he explained.

“What we will require in any restructuring is that Number One, the major shareholders put up adequate additional capital. Number Two, that all the current creditors participate in relieving the financial problem of the airlines. Number Three, that local banks participate in the financing,” he added. Only once such conditions were met and the DoF was satisfied with the management of the company, would it be the right time for government financial institutions to participate, he said.