Garuda Indonesia (Persero) Tbk
Garuda CEO Says 19% Recovery Rate for $500M Sukuks Due 2023, Lessors, Carrier Plans to Cut Fleet to 66 Aircraft; Certain Lessors Place Claims in PKPU as Company Proposes New Agreements to Overwrite Existing Contracts for Lessors to Enter UK Scheme of Arrangement
Wed 01/19/2022 00:32 AM
Irfan Setiaputra, CEO of Indonesian flag carrier PT Garuda Indonesia Tbk, told Reorg that the carrier’s restructuring proposal features a 19% recovery rate for lessors and sukuk holders, comprising two-thirds in 10-year 7.25% bonds and one-third in equity. However, restructuring terms differ across creditor groups and debt claims, Setiaputra said. Continue reading for actionable insights and analysis on Indonesian flag carrier Garuda's sukuk proposal, and request a trial to access reporting and analysis on hundreds more stressed, distressed and performing credits.
On the operational front, Setiaputra said that Garuda intends to cut its aircraft fleet to 66 - a number the carrier thinks is reasonable for it to turn a profit in the future.
Reorg previously reported that Garuda and its subsidiary PT Citilink Indonesia expect to reduce their aircraft fleet from 202 in 2019 to 134 this year, and will reduce the types of aircraft in their fleet to seven from 13 and will focus on domestic routes - mainly focused on cargo flights - based on comments from Indonesia’s Deputy Minister for State-Owned Enterprises (SOEs) and a presentation given at a November House of Representatives hearing. Reorg reported in September 2021 that the company planned to remove around 80 aircraft from its fleet and cancel orders for more than 90 aircraft, with the plans including returning a significant number of widebody aircraft.
The restructuring proposal includes an injection of IDR 7.5 trillion ($523.4 million) of new money into the airline after the PKPU process, two separate sources said. Garuda had previously signed an agreement at the end of 2020 with PT Sarana Multi Infrastruktur (Persero) for an up to IDR 8.5 trillion program to issue Mandatory Convertible Bonds (MCBs) with tenors up to seven years. Garuda issued IDR 1 trillion MCBs off the program, but in June 2021 said that its funding source in the short term came from operating income, and that it had been unable to meet requirements to draw down further from the program.
Various Indonesian media outlets from late 2020 through 2021 published details of Garuda’s initial restructuring proposal, including creditor groups, payment plans and expected haircuts, ranging from 0% in the case of tax-related claims and employees - with repayment in tranches - to haircuts of 70% to 85% for the sukuks, private banks, and lessors. Aggregated details of the news reports are captured in the table below, which is taken from Reorg’s Jan. 12 Garuda webinar.
Garuda previously went through restructurings in 1998 to 2001, after five years of operational losses amounting to over $800 million in total and negative cash flow of $150 million to $400 million each year, as discussed on Reorg’s recent webinar. The result was a restructuring of around $2.4 billion in liabilities, implemented in part by way of schemes of arrangement in England and Singapore, voluntary agreement with certain creditors to term out their debt, conversion of SOE debt into MCBs, and a conversion of existing government debt into equity.
However, a further restructuring was required in 2005 after the airline defaulted on its debt. The government made it clear that a bailout was not on the cards. The restructuring was delivered by way of a debt buyback programme. Garuda was listed in 2011.
During the current Covid-19 pandemic, Garuda in June 2020 obtained consent to amend terms of its $500 million 5.95% sukuk from 90.88% of holders, including agreeing a three-year extension, as reported. That was enough to stave off a more holistic restructuring, and Garuda finally entered into a temporary 45-day in-court supervised restructuring, or PKPU, on Dec. 9, 2021, on a petition filed by PT Mitra Buana Koorporindo, after an earlier petition filed by PT My Indo Airlines had been rejected on Oct. 21, 2021.
The illiquid sukuk was indicated at various pricing, in the high teens to low and mid-20s today, according to two buysiders.
Current Restructuring
Garuda has guided that the restructuring of its liabilities would be effected by parallel processes through the PKPU, and an English scheme of arrangement to treat claims of the aircraft lessors. However, considerations arising from the interactions between these processes include the rule in Gibbs, and the Cape Town Convention.
At the same time as creditors digest the potential complications, lessors have not been paid lease rates for around 15 to 18 months, and Garuda has yet to provide guidance on how it intends to pay them over the course of the forthcoming restructuring - with a full 270-day PKPU process expected to extend into September 2022 - according to two sources with knowledge. As a result, a number of foreign lessors recently filed claims under the PKPU which ballooned the figure in claims submissions.
Preliminary data shows total submitted claims from 470 creditors as of Jan. 5 amounting to around IDR 198 trillion ($13.9 billion), according to court appointed administrators of the carrier, as reported. As Reorg reported Nov. 9, Indonesia’s Deputy Minister for State-Owned Enterprises (SOEs) Kartika Wirjoatmodjo told House of Representatives members at a hearing on the same day that the carrier expects to decrease its liabilities to $3.69 billion from $9.78 billion, through its restructuring plan.
Foreign lessors which have filed claims in the PKPU include Thales Avionics, Aercap Ireland, Celestial Aviation Trading and ILFC France S.A.R.L., according to details seen by Reorg.
The higher claims figures are because some lessors submitted total and future liabilities of Garuda, and not discounting or calculating the present value of those debts, Bloomberg reported Jan. 10, citing Garuda’s Finance Director Prasetio.
Along with potential uncertainty over the challenges surrounding interaction of the Indonesian and English legal processes, one of the above two sources and a third source noted that Garuda’s proposals for the English scheme include cancelling the commercial terms of existing contracts, with each lessor asked individually to then enter a new agreement outside of the scheme while agreeing to vote in favour of the scheme.
The overall aim of the carrier is to renegotiate the lease contracts for the planes it will use in the future, with the aim of adjusting the cost of aircraft rentals to align with current market rates, two of the three sources said. The carrier’s request for power by the hour arrangements during the course of the restructuring is also a negative for lessors, according to one of the three sources and a fourth lessor source, since it will effectively mean accepting three years of no lease payments from the carrier.
The Ministry of State Owned Enterprises, in collaboration with Indonesia’s Attorney General, also recently announced as investigating allegations of graft at Garuda in relation to ATR 72-600 aircraft leases. Erick Thohir, Minister of SOEs, has been quoted in official statements as saying that “data shows there are indeed signs of corruption in the leasing contracts of aircraft procurement, and we suspect there are various manufacturers involved”.
Legal Considerations
With lessors accounting for an estimated around 65% of Garuda’s total liabilities, their treatment through the English scheme and its interaction with the PKPU is central to discussions of the legal aspects of the proposed restructuring.
For a fuller discussion of legal considerations, Reorg’s Webinar can be seen HERE.
According to the rule in Gibbs, debt obligations governed by English law - in this case the aircraft leases - can only be discharged by an English process. As such, it is suggested that lessors to Garuda would be best treated under a English scheme of arrangement, given that the lease contracts cannot be compromised by a foreign court or proceeding.
An English scheme can best be characterised as a company law - rather than an insolvency law - procedure that allows a debtor to reach a compromise or arrangement with its creditors. While the recent English scheme of arrangement for Malaysian Airlines is seen as a useful comparison case - as it confirms that foreign airlines can use an English scheme to compromise claims under English law governed aircraft operating leases - the scheme itself ultimately received support of all affected creditors, which meant the court did not have to opine on whether schemes are “insolvency related events”.
According to various sources, the limited progress made so far in relation to the English scheme combined with the lack of clarity on whether such a scheme would represent an insolvency-related event - no English court has so far ruled on that point - could have encouraged lessors to file claims under the PKPU, as that process is an insolvency-related event and would give them confidence in being able to invoke the Cape Town Convention, granting them the rights to seize their aircraft should the need arise.
The Cape Town Convention and Aircraft Protocol regulates the priorities of international interests and establishes standard default remedies, including the occurrence of an ‘insolvency related event’. Such interests can include a financier’s or lessor’s security interests, including most airframes, aircraft engines, and helicopters.
However, while lessors could invoke the Cape Town Convention through a PKPU process, the historical case of Indonesian carrier Batavia Air suggests there can be difficulties in its application, as was seen during Batavia’s insolvency process, based on media reports.
According to the Associated Press, the Central Jakarta Commercial Court in January 2013 declared budget carrier Batavia Air bankrupt, following a petition filed by US-based International Lease Finance Corporation (ILFC). Batavia Air had failed to pay a $4.7 million debt to purchase two Airbus A330s financed by ILFC through a leasing scheme. The court announcement came months after Malaysia-based low-cost carrier AirAsia aborted an $80 million deal to acquire a 49% stake in Batavia Air as it deemed it too risky, with a potential negative impact on its earnings, AP reported.
Following the ruling, according to a Kompas report in early 2013, employees of Batavia Air submitted a request to the supervisory judge for consideration in verification proceedings, arguing that aircraft should not be seized by the lessors, as they represented a part of the boedel, or collective active and passive wealth of the airline in bankruptcy. They further argued that employees were preferred creditors, and the lessors should return deposits provided by Batavia Air before assuming the right to take the aircraft, the report adds.
Ultimately, only IDR 40 billion ($2.8 million) was recovered from sales of assets, against Batavia’s IDR 2.54 trillion in debts, according to a 2018 report in Bisnisindonesia.com (Bahasa Indonesia). Funds from the disposal of assets went first to preferred creditors (the tax office and employees), while unsecured creditors included lessors, according to a report in Bisnis.com (Bahasa Indonesia).
A Liputan6.com (Bahasa Indonesia) report in December 2013 discloses that frames of Batavia Air aircraft were abandoned at airports, after engines had been removed, with Angkasa Pura - the entity responsible for management of airports in Indonesia - demanding removal of the frames. A January 2014 report in Kontanmedia (Bahasa Indonesia) notes that the curator of Batavia Air was attempting to sell both aircraft - six Boeing 737-300s are referenced - and planning to auction aircraft engines.
Garuda did not respond to requests for comment on details of its English scheme proposals to lessors or non-payment of lease arrangements.
Read Reorg’s coverage of Garuda HERE.
–Stephen Aldred, Sarah Yuniarni, Rae Wee
On the operational front, Setiaputra said that Garuda intends to cut its aircraft fleet to 66 - a number the carrier thinks is reasonable for it to turn a profit in the future.
Reorg previously reported that Garuda and its subsidiary PT Citilink Indonesia expect to reduce their aircraft fleet from 202 in 2019 to 134 this year, and will reduce the types of aircraft in their fleet to seven from 13 and will focus on domestic routes - mainly focused on cargo flights - based on comments from Indonesia’s Deputy Minister for State-Owned Enterprises (SOEs) and a presentation given at a November House of Representatives hearing. Reorg reported in September 2021 that the company planned to remove around 80 aircraft from its fleet and cancel orders for more than 90 aircraft, with the plans including returning a significant number of widebody aircraft.
The restructuring proposal includes an injection of IDR 7.5 trillion ($523.4 million) of new money into the airline after the PKPU process, two separate sources said. Garuda had previously signed an agreement at the end of 2020 with PT Sarana Multi Infrastruktur (Persero) for an up to IDR 8.5 trillion program to issue Mandatory Convertible Bonds (MCBs) with tenors up to seven years. Garuda issued IDR 1 trillion MCBs off the program, but in June 2021 said that its funding source in the short term came from operating income, and that it had been unable to meet requirements to draw down further from the program.
Various Indonesian media outlets from late 2020 through 2021 published details of Garuda’s initial restructuring proposal, including creditor groups, payment plans and expected haircuts, ranging from 0% in the case of tax-related claims and employees - with repayment in tranches - to haircuts of 70% to 85% for the sukuks, private banks, and lessors. Aggregated details of the news reports are captured in the table below, which is taken from Reorg’s Jan. 12 Garuda webinar.
Garuda previously went through restructurings in 1998 to 2001, after five years of operational losses amounting to over $800 million in total and negative cash flow of $150 million to $400 million each year, as discussed on Reorg’s recent webinar. The result was a restructuring of around $2.4 billion in liabilities, implemented in part by way of schemes of arrangement in England and Singapore, voluntary agreement with certain creditors to term out their debt, conversion of SOE debt into MCBs, and a conversion of existing government debt into equity.
However, a further restructuring was required in 2005 after the airline defaulted on its debt. The government made it clear that a bailout was not on the cards. The restructuring was delivered by way of a debt buyback programme. Garuda was listed in 2011.
During the current Covid-19 pandemic, Garuda in June 2020 obtained consent to amend terms of its $500 million 5.95% sukuk from 90.88% of holders, including agreeing a three-year extension, as reported. That was enough to stave off a more holistic restructuring, and Garuda finally entered into a temporary 45-day in-court supervised restructuring, or PKPU, on Dec. 9, 2021, on a petition filed by PT Mitra Buana Koorporindo, after an earlier petition filed by PT My Indo Airlines had been rejected on Oct. 21, 2021.
The illiquid sukuk was indicated at various pricing, in the high teens to low and mid-20s today, according to two buysiders.
Current Restructuring
Garuda has guided that the restructuring of its liabilities would be effected by parallel processes through the PKPU, and an English scheme of arrangement to treat claims of the aircraft lessors. However, considerations arising from the interactions between these processes include the rule in Gibbs, and the Cape Town Convention.
At the same time as creditors digest the potential complications, lessors have not been paid lease rates for around 15 to 18 months, and Garuda has yet to provide guidance on how it intends to pay them over the course of the forthcoming restructuring - with a full 270-day PKPU process expected to extend into September 2022 - according to two sources with knowledge. As a result, a number of foreign lessors recently filed claims under the PKPU which ballooned the figure in claims submissions.
Preliminary data shows total submitted claims from 470 creditors as of Jan. 5 amounting to around IDR 198 trillion ($13.9 billion), according to court appointed administrators of the carrier, as reported. As Reorg reported Nov. 9, Indonesia’s Deputy Minister for State-Owned Enterprises (SOEs) Kartika Wirjoatmodjo told House of Representatives members at a hearing on the same day that the carrier expects to decrease its liabilities to $3.69 billion from $9.78 billion, through its restructuring plan.
Foreign lessors which have filed claims in the PKPU include Thales Avionics, Aercap Ireland, Celestial Aviation Trading and ILFC France S.A.R.L., according to details seen by Reorg.
The higher claims figures are because some lessors submitted total and future liabilities of Garuda, and not discounting or calculating the present value of those debts, Bloomberg reported Jan. 10, citing Garuda’s Finance Director Prasetio.
Along with potential uncertainty over the challenges surrounding interaction of the Indonesian and English legal processes, one of the above two sources and a third source noted that Garuda’s proposals for the English scheme include cancelling the commercial terms of existing contracts, with each lessor asked individually to then enter a new agreement outside of the scheme while agreeing to vote in favour of the scheme.
The overall aim of the carrier is to renegotiate the lease contracts for the planes it will use in the future, with the aim of adjusting the cost of aircraft rentals to align with current market rates, two of the three sources said. The carrier’s request for power by the hour arrangements during the course of the restructuring is also a negative for lessors, according to one of the three sources and a fourth lessor source, since it will effectively mean accepting three years of no lease payments from the carrier.
The Ministry of State Owned Enterprises, in collaboration with Indonesia’s Attorney General, also recently announced as investigating allegations of graft at Garuda in relation to ATR 72-600 aircraft leases. Erick Thohir, Minister of SOEs, has been quoted in official statements as saying that “data shows there are indeed signs of corruption in the leasing contracts of aircraft procurement, and we suspect there are various manufacturers involved”.
Legal Considerations
With lessors accounting for an estimated around 65% of Garuda’s total liabilities, their treatment through the English scheme and its interaction with the PKPU is central to discussions of the legal aspects of the proposed restructuring.
For a fuller discussion of legal considerations, Reorg’s Webinar can be seen HERE.
According to the rule in Gibbs, debt obligations governed by English law - in this case the aircraft leases - can only be discharged by an English process. As such, it is suggested that lessors to Garuda would be best treated under a English scheme of arrangement, given that the lease contracts cannot be compromised by a foreign court or proceeding.
An English scheme can best be characterised as a company law - rather than an insolvency law - procedure that allows a debtor to reach a compromise or arrangement with its creditors. While the recent English scheme of arrangement for Malaysian Airlines is seen as a useful comparison case - as it confirms that foreign airlines can use an English scheme to compromise claims under English law governed aircraft operating leases - the scheme itself ultimately received support of all affected creditors, which meant the court did not have to opine on whether schemes are “insolvency related events”.
According to various sources, the limited progress made so far in relation to the English scheme combined with the lack of clarity on whether such a scheme would represent an insolvency-related event - no English court has so far ruled on that point - could have encouraged lessors to file claims under the PKPU, as that process is an insolvency-related event and would give them confidence in being able to invoke the Cape Town Convention, granting them the rights to seize their aircraft should the need arise.
The Cape Town Convention and Aircraft Protocol regulates the priorities of international interests and establishes standard default remedies, including the occurrence of an ‘insolvency related event’. Such interests can include a financier’s or lessor’s security interests, including most airframes, aircraft engines, and helicopters.
However, while lessors could invoke the Cape Town Convention through a PKPU process, the historical case of Indonesian carrier Batavia Air suggests there can be difficulties in its application, as was seen during Batavia’s insolvency process, based on media reports.
According to the Associated Press, the Central Jakarta Commercial Court in January 2013 declared budget carrier Batavia Air bankrupt, following a petition filed by US-based International Lease Finance Corporation (ILFC). Batavia Air had failed to pay a $4.7 million debt to purchase two Airbus A330s financed by ILFC through a leasing scheme. The court announcement came months after Malaysia-based low-cost carrier AirAsia aborted an $80 million deal to acquire a 49% stake in Batavia Air as it deemed it too risky, with a potential negative impact on its earnings, AP reported.
Following the ruling, according to a Kompas report in early 2013, employees of Batavia Air submitted a request to the supervisory judge for consideration in verification proceedings, arguing that aircraft should not be seized by the lessors, as they represented a part of the boedel, or collective active and passive wealth of the airline in bankruptcy. They further argued that employees were preferred creditors, and the lessors should return deposits provided by Batavia Air before assuming the right to take the aircraft, the report adds.
Ultimately, only IDR 40 billion ($2.8 million) was recovered from sales of assets, against Batavia’s IDR 2.54 trillion in debts, according to a 2018 report in Bisnisindonesia.com (Bahasa Indonesia). Funds from the disposal of assets went first to preferred creditors (the tax office and employees), while unsecured creditors included lessors, according to a report in Bisnis.com (Bahasa Indonesia).
A Liputan6.com (Bahasa Indonesia) report in December 2013 discloses that frames of Batavia Air aircraft were abandoned at airports, after engines had been removed, with Angkasa Pura - the entity responsible for management of airports in Indonesia - demanding removal of the frames. A January 2014 report in Kontanmedia (Bahasa Indonesia) notes that the curator of Batavia Air was attempting to sell both aircraft - six Boeing 737-300s are referenced - and planning to auction aircraft engines.
Garuda did not respond to requests for comment on details of its English scheme proposals to lessors or non-payment of lease arrangements.
Read Reorg’s coverage of Garuda HERE.
–Stephen Aldred, Sarah Yuniarni, Rae Wee
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