PH Government To Bail Out PAL

If Bankruptcy Proceedings Goes Well

9 September 2021

The government of the Philippines (GOP) said Thursday it will help ailing flag carrier Philippine Airlines (PAL) get on its feet if all goes well with its corporate restructuring in New York, Philippines Finance Minister announced this morning.

Finance Secretary Carlos Dominguez III said they are waiting for the outcome of Chapter 11 filing in New York before deciding whether to use taxpayers money to help the loss-making national carrier raise funds for its post-restructuring needs.

Under the restructuring plan to be approve by the Southern District Court of New York, PAL aircraft lessors agreed to give the airline $2 billion in “permanent balance sheet reductions” which would enable it to “consensually contract fleet capacity by 25 percent,” and reduce lease payments significantly.

According to Dominguez, the government has been in touch with local airlines since March last year to discuss any form of aid that the government can extend to them. Among them are contracts for repatriation and bayanihan flights, and vaccines delivery amounting to more or less $1.2 billion.

"While the Duterte administration cannot afford to rescue ailing local airlines through bailouts, It's State Banks are willing to lend money to carriers subject to certain conditions."The Finance Chief said .

As to what these conditions were,  Dominguez said major shareholders must infuse additional “adequate” capital to the company while current creditors should also step in to “relieve” financial troubles. Lastly, local banks should pitch in for financing.

Dominguez said budget carrier Cebu Pacific took this route when it completed raising its $500-million recovery fund, with private investors pitching in half of that amount. Apart from the recovery fund, Cebu Pacific got a P16 billion loan from a syndicate of banks, with state-run lenders contributing 18% to the credit line.

“Although we are not the biggest financiers, we are the keystone of finance. You know the keystone in an arch, it is the stone without which nothing happens,” he explained on Cebu Pacific government financing.

But the finance chief said PAL “took a different path” when it filed for bankruptcy.

“So I told them , the conditions I’ve set before are still on the table, but if you will file for bankruptcy, we will have to wait for the results of the bankruptcy proceedings,” Dominguez said. 

“Bankruptcy courts do not necessarily follow what we want.” He adds.

Nilo Thaddeus Rodriguez, company Chief Financial Officer, said PAL gladly followed the DOF advice by raising additional equity from shareholders, negotiated with aircraft lessors, and with local banks pitching in to raise the $505 million recovery fund.

Rodriguez said they would certainly welcome help from the government, especially in raising the exit financing. 

The flag carrier is required by the Bankruptcy Court in New York to raise $505 million to have its rehabilitation plan approved.

PAL disclosed that they will need an additional US$150 million exit facility financing that will be provided by two new lenders, without elaborating the funding sources.

The Finance Chief, who was a former PAL president himself, said the government would participate in any fundraising activities of the airline only if all goes well with its corporate restructuring. 

Dominguez said this was made to make sure that PAL can pay whatever amount that state-run banks will lend to the company.

“I do not want Land Bank and DBP to go in and finance a company that is filing for bankruptcy and we don’t know how it will turn out,” Dominguez said.

Land Bank of the Philippines and Development Bank of the Philippines are government financial institutions and state investment arm.

“One of our GFIs was provided with bankruptcy filing and we are reviewing it and we are following this very carefully. If in the end it looks like it will be a prudent investment for the taxpayers’ money, we will participate,” he added.

Currently, PAL’s cash position has dropped to $21.8 million at the end of August 2021 from $43.069 million at the end of 2020, which according to its filing in New York is dangerously low, significantly below prudent levels which for an airline of PAL’s size, would typically require not less than $300 million.

PAL is paying roughly $48 million a month in lease payments for 85 aircraft in its fleet, majority of payment of which is attributed to its wide-body fleet, half of which is sitting on the ground idle due to the pandemic and government imposed flight restrictions across the world where it is used.

The post petition borrowings and the DIP credit facility will enable PAL to continue to maintain a minimum cash balance of at least $150 million upon final approval of the debt restructuring plan, and provide sufficient liquidity to fund the airlines operation in the next five years.