✈️ New Chapter 11 Bankruptcy Filing – Philippine Airlines, Inc.✈️
Earlier this month, Philippine Airlines Inc. (the “debtor”) filed for chapter 11 in the Southern District of New York. As of July 31, 2021, the debtor’s assets and liabilities were $4.1b and $6.07b, respectively.
The debtor is headquartered in the City of Pasay in the Philippines, and it is one of the oldest commercial airlines in Asia. Its pre-pandemic operations spanned 35 domestic locations and 40 foreign cities.
As the debtor acknowledges, Philippine Airlines has faced intense competition in recent years from both existing and new participants in the market. The industry as a whole is sensitive to price-discounting policies and jet fuel price increases, and it has been negatively impacted by a lack of airport infrastructure and changes to relevant regulatory environments. Nonetheless, Philippine Airlines continued to grow through 2019 and garnered international recognition as a quality airline.
With that as a backdrop, do you want to take a wild guess what drove the debtor into chapter 11? Unless you’ve been living under a rock since March 2020, this shouldn’t come as any surprise:
[Philippine Airlines, Inc. (“PAL”)] has continued to implement initiatives to increase growth and enhance operations. However, PAL, like so many other airlines, confronted an extraordinary set of circumstances and flight disruptions caused by the COVID-19 pandemic starting in the early part of 2020. The COVID-19 crisis had a catastrophic impact on the aviation industry, forcing major airlines to effectively halt a significant majority of their business operations. For major international airlines such as PAL, the dramatic reduction in worldwide air travel caused significant and sudden balance sheet losses and created intractable challenges to meeting existing payment obligations… The extended nature of this crisis continues to this day to have a critical impact upon PAL’s business and operations, and with global vaccination efforts being challenged by new, highly contagious variants of the COVID-19 virus, the future of the airline industry remains uncertain. As a result of the havoc created by the global pandemic PAL’s revenue fell by over 60% from 2019 to 2020.
The debtor is hardly the first airline to file chapter 11 as a direct result of COVID-19. Others include LATAM Airlines Group SA (discussed here and here), Aerovías de México SA de CV (Aeroméxico)(discussed here, here, and here), and Avianca Holdings S.A. (discussed here, here, here, and here).
According to the debtor’s Chief Financial Officer Nilo Thaddeus P. Rodriguez, the debtor expects to exit chapter 11 within a few months.
But is that realistic? Let’s take a look at the timelines of the airline filings mentioned above:
Avianca filed on May 10, 2020. The disclosure statement was approved last week.
LATAM filed on May 26, 2020. No plan or disclosure statement has been filed, and the exclusivity period has been extended multiple times. LATAM is currently in the process of negotiating exit financing.
Aeroméxico filed on June 30, 2020. No plan or disclosure statement has been filed, and Aeroméxico just moved to extend the exclusivity period.
Based on precedent alone, exiting chapter 11 within a few months doesn’t seem realistic for the debtor. But there are two key factors present here that aren’t present in the other airline bankruptcies: RSAs and a controlling shareholder willing to do whatever it takes to keep the company alive.
First, the debtor entered chapter 11 with “dozens” of RSAs (and subsequently added more, securing more favorable votes). The parties to the RSAs include most of the debtors’ funded debtholders, lessors, original equipment manufacturers, and maintenance, repair, and overhaul providers. These groups represent over 90% of the claims expected to vote on the proposed plan.
The RSAs contemplate a $1.8b reduction in aircraft operating lease payments and a $250mm reduction in unsecured bank debt. But general unsecured creditors remain unimpaired, unless they agreed otherwise with the debtor. The RSAs also provide that the outside date for consummation of the plan is 180 days after the petition date.*
Although the shock of Covid is really what drove the debtor into chapter 11, the RSAs nonetheless contemplate a plan of reorganization that the debtors believe will create a leaner, more efficient airline in the long run. As explained by the debtor:
PAL plans to take a number of measures to optimize its network in connection with the Restructuring Support Agreements and the Proposed Plan. In particular, PAL will exit unprofitable markets and continue to fly only those routes that are, or can be made, profitable, while reintroducing capacity in line with evolving demands. PAL will also selectively increase regional capacity in targeted growth markets. In doing so, PAL will strengthen its Manila hub and strategically redeploy capacity to more profitable destinations as demand returns. PAL will consolidate domestic capacity from Clark International Airport (CRK) to Manila International Airport (MNL) due to market demands. In addition, PAL’s revised business plan anticipates growing capacity in short haul regional routes (especially growth markets such as China), consolidating capacity in the West Coast gateways and cancelling certain ultra-long-haul flights, while maintain profitable opportunistic flying from Cebu as a source of continued growth… Additionally, given the current economic climate, the Debtor has a surplus of aircraft in its fleet. In accordance with the Restructuring Support Agreements and the Proposed Plan, the Debtor plans to reduce fleet size and composition in line with the expected demands and new network.
The debtor believes that the proposed plan will lead to sustained future profitability, to the tune of $220mm in operating income in 2022 and $364mm in 2023. These predictions are pretty damn bold considering 2019 operating income was about $58mm. Not to mention that, as unfortunate as it is to admit, we’re not out of the woods on the Covid front.
Second, controlling shareholder Lucio Tan guaranteed his family’s full backing until the debtor recovers:
“It became my commitment of a lifetime to build the airline into a flag carrier that all Filipinos could look up to with pride,” Tan said.
“On the 80th anniversary of Philippine Airlines, my family and I make this renewed commitment to you: We will complete the recovery of Philippine Airlines,” he said.
“We firmly support the management and employees of Philippine Airlines as they undergo the restructuring process. Together, we will deliver an airline with a reorganized balance sheet, a streamlined workforce, and a renewed sense of mission,” he added.
He’s already put his money where his mouth is. Through Buona Sorte Holdings Inc. and affiliates, the family has provided the debtor with $100mm in pre-petition bridge financing and a commitment of a $505m DIP facility.
The bridge financing was essentially just a band-aid while the debtor negotiated the RSAs and DIP financing. It doesn’t seem like there was any hope for an out-of-court resolution. According to the debtors:
In order to have the time and flexibility to negotiate the Restructuring Support Agreements with over 40 counterparties, a process that has taken almost a full year, it was necessary for the Debtor to obtain prepetition bridge financing in the aggregate principal amount of $100 million. It did so pursuant to three secured Bridge Loan Facilities provided by its shareholder and proposed Initial Tranche A DIP Lender, Buona Sorte Holdings Inc. Without these Bridge Loans, the Debtor would not have been able to continue its operations or avoid a value-destructive free fall into bankruptcy … The Bridge Loan Obligations were incurred prepetition in contemplation of a bankruptcy filing.
The DIP facility is broken up into two tranches: Tranche A ($250m) and Tranche B ($255m). Both carry a 9.5% interest rate and a 1% origination fee. The DIP facility also includes a rollup of the bridge loans, but the debtor notes that any creditor being jumped in the priority line is still unimpaired under the proposed plan.
In addition to these terms, the DIP facility includes the option to convert the financing to long-term unsecured debt and equity upon emergence from chapter 11. If the debtor makes that election: Tranche A would convert into unsecured loans, still governed by the DIP credit agreement, that mature in approximately five years; and Tranche B would convert to 79.5% of the reorganized debtor. And there’s the kicker. Tan isn’t lending to the debtor to scratch out a few bps over the coming months—he’ll almost certainly own this company again when it emerges from bankruptcy.
In light of the RSAs and Tan’s willingness to support the debtor in any way possible, exiting chapter 11 in a few months may actually be realistic.
The post-petition capital structure includes:
$505mm DIP facility;
$387mm U.S. securitization facility;
$260mm Japanese securitization facility;
$102mm secured bridge loans; and
$274mm bank loans (provided by Asia United Bank, Philippine National Bank, China Bank, and Union Bank. The loan from Philippine National Bank is partially secured, whereas the others are unsecured).
The first day hearing was held on September 9, 2021 and the debtor secured access to $20mm in interim financing. The second day hearing will be held on September 30, 2021. The debtor is represented by Debovoise & Plimpton LLP (Jasmine Ball, Nick S. Kaluk, III, Elie J. Worenklein) and Seabury Securities LLC as investment banker.
* The DIP facility includes the same milestone.
Date: September 3, 2021
Jurisdiction: S.D. New York (Judge Shelley C. Chapman)
Legal: Debovoise & Plimpton LLP (Jasmine Ball, Nick S. Kaluk, III, Elie J. Worenklein), Norton Rose Fulbright US LLP, and Angara Abello Concepcion Regala & Cruz.
Investment Banker/Financial Advisor: Seabury Securities LLC
Claims Agent: Kurtzman Carson Consultants LLC (Click here for free docket access)
Other Parties in Interest:
DIP Lenders: Buona Sorte Holdings, Inc. and PAL Holdings Inc.
Legal: White & Case LLP (Richard S. Keberdle, Andrew T. Zatz, Todd Wolynski, Kathryn Sutherland-Smith
Bank Lender: Philippine National Bank
Legal: Herbert Smith Freehills New York LLP (Jonathan C. Cross)
Aircraft Financing Lenders: PK Airfinance S.A.R.L. (PK), AWAS Aviation Trading DAC, AWAS 1 Ireland Limited, AWAS 5371 Trust, Falcon 2019-1 Aircraft 1 Limited, DCAL 1 Leasing Limited, DCAL 2 Leasing Limited, BNP Paribas,
Legal: Clifford Chance US LLP (Jennifer C. DeMarco, Michelle M. McGreal)
Aircraft Financing Lenders: Pajun Aviation Leasing 1 Limited, Pajun Aviation Leasing 2 Limited, Pajun Aviation Leasing 3 Limited, JPL Stratos Leasing 1 Limited, JPA No. 112 Co., Ltd., Wilmington Trust SP Services (Dublin), SMBC Aviation Capital Limited
Legal: Vedder Price P.C. (Michael J. Edelman, Jeremiah J. Vandermark)
Indenture Trustee under Certain Aircraft Financing Indentures: Wells Fargo Bank, National Association
Legal: Hughes Hubbard & Reed LLP (Christopher Gartman, Elizabeth A. Beitler)