Proposed PAL Financing Gets Cool Reception

Business Daily

Wednesday, December 9, 1998

By ARVIN P. PANES, RODEL A. ALZONA and MARIE A. SURHANO

A day after officials floated the idea of government financial institutions (GFIs) infusing money as “bridge financing” into cash-strapped Philippine Airlines (PAL) said yesterday it had no intention of doing such a thing in the light of its heavy exposure to PAL.

According to PNB President Benjamin Palma-Gil, the bank lent the airline additional funds on top of the P750-million equity investment done earlier through PR Holdings, a firm owned by Filipino-Chinese tycoon Lucio Tan who owns 67% of the flag carrier.

PNB is one of the secured creditors of PAL and has expressed willingness to write off part of its investment as loss, Palma-Gil further said.

His comments came after Finance Secretary Edgardo B. Espiritu had told radio station DZMM that government financial institutions (GFIs) would be willing to extend bridge financing to PAL if Cathay came in as a strategic partner.

The International Finance Corp. (IFC), the private arm of the World Bank, might also invest in PAL if Cathay’s investment pushed through, he said.

Remedios Macalincag, President and Chief Executive officer of the Development Bank of the Philippines (DBP) was also cool to the proposal.

“Government cannot take over what it has already privatized,” she said, pointing out that DBP’s main thrust was geared toward supporting small- to medium-sized enterprises (SME).

Macalincag affirmed DBP also had no intention of increasing its stake in PAL and was only interested in recovering its investment, also done through PR Holdings.

Land Bank of the Philippines President Florido Casuela, meanwhile, went on record on saying investment recovery was preferable to expanding Land Bank’s exposure to PAL.

Casuela, however, confessed willingness to listen to “offers of additional financing depending on the terms of loans.”

Last Monday, Espiritu had announced that the three GFIs could syndicate a loan to pay off PAL’s obligations. These obligations include loans from international creditors and lease payments to the United States Export-Import Bank.

“It would be the worst case scenario,” Espiritu said, adding, “On a credit evaluation basis, government operations and other banks can provide bridge financing while waiting for the capital infusion in April.”

Cathay and IFC officials were not immediately available for comment.

Still Cathay?

PAL’s long-awaited rehabilitation submitted on Monday envisions an injection of fresh capital of $150 million into the airline. The first tranche of $90 million is planned for release after the Securities and Exchange Commission approves the plan.

Tan and other investors would provide the first tranche.

Espiritu further said, “It seems talks are now being revived and maybe in two to three days we’ll know for sure if Cathay will come in or not.”

Last Wednesday, Cathay said it had abandoned talks with PAL due to differences in issues such as management control and valuation.

“The greatest issue is the constitutional limitation, the participation of foreigners in policy-decision making,” Espiritu said.

He said the issue cropped up because “the strategic partner would have a final say over the board, the running of Philippine Airlines.”

“They would be violating the Constitution… If it (only) involves day to day management, PAL stockholders are ready to give way.”

Under the Constitution, foreign participation in a utility is limited to 40% equity. “We want to finish within the week to assure the big creditors of Philippine Airlines. It would be difficult if Philippine Airlines closes,” Espiritu said.

Conditions

In a valiant attempt to clarify the issue, Malacañang yesterday maintained it would not “bail out or subsidize” PAL.

Presidential Spokesperson Fernando Barican stressed government’s stand remain unchanged and that the “bridge financing” initiative of Espiritu depended on several factors:

• PAL’s continued commercial viability;
• Credit evaluation;
• The involvement of a consortium of private banks and strategic partners in any rescue package; and,
• The package’s inclusion in a rehabilitation plan to be approved by PAL creditors and the Securities and Exchange Commission (SEC).

Barican added: “The President is confident that these conditions will be met.”

Espiritu, meanwhile, did further explaining when he emphasized that the “bridge financing” would come in the form of loans from local banks and GFIs to bridge the gap until an eventual capital infusion by a yet to be strategic partner.

“GFIs will no longer invest money in PAL,” Espiritu said.

The Finance Secretary added the President and Cathay officials had already engaged in talks over the weekend.

A Long Process

The SEC yesterday formed a three-member task force to scrutinize the rehabilitation plan submitted by PAL.

In a two-page order by the three-member hearing panel, the task force was given 30 days to analyze the plan and submit recommendations of the hearing panel.

At the same time the commission ordered PAL to provide all its creditors with a copy of the plan. The SEC wants to get comments from creditors within 15 days of receipt.

The task force includes Jesus Olanday of the examiners and appraisers department, Manolito Soller of the brokers and exchange department, and Rosita Guerrero of the securities and investigation clearing department.

In the meantime, PAL still enjoys blanket protection from all its creditors.

“The order issued by the hearing panel on July 1, 1998 remains in force and binding, and the mandatory compliance whether natural or judicial is hereby reiterated,” the order stated.

According to Manolo Aquino, PAL Executive Vice President for administration and services, the company could provide all major creditors with a copy of rehabilitation plan before the year ends.

“We are already providing them with copies. This is just the start of a very long process,” Aquino said.

Wary Customers

The SEC has projected hearings on PAL to start on February next year. “We expect to have at least 75% of the creditors to have submitted their comments by that time,” hearing panel member Ysobel Yasay-Murillo said.

Prior to the hearing, PAL management, the interim receivership committee (IRR), and the advisor will be available to answer questions from creditors.

PAL and the IRR intend to conduct a series of meetings with creditor groups to discuss the plan in detail.

Aquino said the company was feeling the pressure of a drop in the number of passengers.

“The rehabilitation plan is already there, but what is important is the patronage of the riding public...at present, many people are changing travel plans,” Aquino said.

He added: “Right now, we have a load capacity of only 65% when, in fact, we are supposed to be doing 80% at these times.”

November and December, in the past, have been peak months for PAL because of the usual increase in the number of returning Filipino overseas contract workers.

Aquino admitted that a big chunk of PAL’s international market had already been gobbled up by competitors.

Under the rehabilitation plan, PAL expects to be fully rehabilitated by the year 2005.

PAL sought the protection of the SEC last June as the company sank P85.1 billion into debt due to the combined effects of the ambitious fleet expansion, the sudden downturn in the Asian economy, and the trouble with its restive labor force.

PAL still continues to be the leader in the local airline industry with a 63% market share.