Talks With PAL Over, Cathay Reiterates

The Business Daily

Thursday, December 10, 1998

By RODEL A. ALZONA

Cathay Pacific Airways Ltd. reiterated yesterday that talks to acquire a stake in Philippine Airlines Inc. (PAL) were over.

“As far as we are concerned, this is behind us,” Chief Operating Officer Philip Chen told reporters.

Responding to reports that the Philippine government has been trying to resurrect talks between Cathay and PAL after Cathay pulled out of talks last week, Chen said, “We have had no formal approach.”

Asked whether Cathay would be interested in buying certain parts of PAL, Chen said: “We actually have not come down to those details.”

He declined to say how much Cathay had spent on due diligence work on PAL. “Cathay has put in a lot of resources – financial and manpower,” he said.

Adding to the already sufficiently curious developments was former First Lady Imelda Marcos’ claim of ownership of PAL, which has prompted President Joseph Estrada to assure would-be investors of PAL that such claims would not affect matters.

Aside from downplaying reports that the mystery talks between PAL and Cathay Pacific might be derailed by the move by Mrs. Marcos, the Chief Executive dared her to show proof of ownership.

“If she is really telling the truth, she could produce a document to prove her claim,” the President said.

In spite of persistent denials out of Hongkong, Estrada again made mention of the supposed renegotiation process with Cathay.

In an ambush interview, the Chief Executive said “We’re trying our best to reach an agreement with Cathay.”

“You know this a negotiation, and you cannot set the time when they will agree. Maybe they will not agree, maybe they will agree,” Estrada said.

Doomsday Scenario

As more details are made available each day by the Securities and Exchange Commission (SEC) regarding the rehabilitation plan of PAL, it has become obvious that the airline, in spite of professing faith in rehabilitation, has also made provisions for a doomsday scenario.

The five-member interim receivership committee (IRR) said in the event a liquidation process should be needed, PAL would be facing a shortfall of $976.70 million.

Cuervo Appraisers Inc., the company which made an estimate value of the airline company’s assets should they be diagnosed of in the next three to six months – indicated that PAL could raise $1.37 billion against total claims of $2.34 billion, including pre-petition interest of $94.90 million.

“The immediate sale value of PAL’s assets would be ended by the current state of the airline industry a...PAL’s operating fleet,” the IRR stated.

It added: “The liquidation analysis assumed the aircraft would be sold on an individual basis. Further discount may be appropriate if a large part of the fleet were to be sold on a portfolio basis. The liquidation value of the non-aircraft aviation-related assets may be further influenced by the limited number of potential purchasers of such special purpose assets.”

The largest portion in the claims against PAL consists of secured aircraft claims amounting to $1.49 billion, with PAL only able to pay a maximum of $1.24 billion if its entire fleet is sold.

Secured debt from banks amounts to $206.70 million, which PAL could only match with $108.40 million. Of trade creditor claims of $195 million, PAL could only settle $12 million. PAL, meanwhile, does not have any provision to deal with its debt in the form of floating rate notes worth $178.50 million, due on January 2000.

In addition to that, PAL has no resources to match unsecured debt, claims for early return of operating leases, and subordinate claims.

Claims Piling Up

Meanwhile, another claim worth $3 million against the airline company was filed yesterday before the SEC by Security Bank Corp. (SBC).

In a four-page petition, SBC said it was the trustee of $3 million worth of Eurodollar bonds set to mature in January 2000.

“SBC as a trustee is filing the claim to protect, preserve, and prevent the asset from being dissipated,” the petition stated, adding that it is now seeking payment of the amount including interest.

The three-man task force created to review the rehabilitation plan of PAL is set to submit recommendations to the hearing panel within the next 30 days.

PAL officials have been showing concern over the future viability of the company as passenger loads are only averaging 65% during this Christmas season when the company traditionally should be running on at least 80% capacity.

The IRR further stated that with the huge deficit of assets against the total debt of the company, it foresees secured creditors taking possession of their securities.

The fact that the IRR is expecting a huge asset deficit in the event of a liquidation process might have been the main reason for the airline company to ask SEC for an extended maturity date on its debt once the plan is approved.

Under the plan, fully secured creditors will be asked to extend debt maturity by three years to 15 years; partially secured should extend maturity of loans by five years to 15 years.

Lease rental payments, on the other hand, will commence this month at a reduced rate, and unsecured creditors will be issued bonds which can be claimed within one to 12 years. – With reports from Marie A. Surbano and Reuters