Three Lessors Demand Return of PAL Aircraft

Business World

Tuesday, December 15, 1998

By MARICRIS C. CARLOS

Senior Reporter

Three of the leasing firms of Philippine Airlines lnc. (PAL) again asked the Securities and Exchange Commission (SEC) to order PAL to return four Boeing 737-300 airplanes.

This developed after PAL reportedly defaulted on the payment of P150 million worth of arrears due them.

The motion was filed before the SEC by General Electric Capital Corp. of the United States, and Ireland-based firms Airplanes Finance Ltd. and GPA Group Plc.

The three companies asked SEC to order PAL to deliver the leased aircraft to the Shannon International Airport in Ireland.

They also asked the SEC to stop PAL from using the airplanes while these are in its possession.

This is the second time the lessors asked PAL to return the aircraft.

In their recent motion, the three lessors said their "right'. to recover the assets "is based on contract as well as statute."

Nelson Antolin, counsel for the three leasing firms, said the statutory basis is found in a provision in the Civil Code, which gives the lessor the right to terminate the lease contract and be paid damages should the lessee fail to meet its obligations.

PAL's failure to pay the leasing fees "is not the only event of default under the lease agreements" PAL signed with his clients, Mr. Antolin said.

Other instances of default cited are:

• appointment of a receiver or a similar officer who takes possession of the whole or any material part of the assets, rights or revenues of the lessee;
• suspension of the payment of debts denominated in foreign exchange or inability or admission of inability by the lessee to pay its debts as they fall due;
• suspension of payment in any jurisdiction; and
• suspension of the lessor's business as an airline carrier

General Electric, in particular, asked the SEC to order PAL to return two Boeing aircraft saying PAL violated the lease contract when it failed to meet its lease payments.

PAL has two lease agreements with General Electric covering two Boeing aircraft. The other two firms, meanwhile, each leased one Boeing aircraft to PAL.

In their earlier petition, it was noted PAL owes General Electric a total of $1.65 million in rental fees; Airplanes Finance, $I.23 million; and GPA Group, $608,162.39.

SEC is currently reviewing PAL 's rehabilitation plan to determine whether it is feasible for the carrier to continue its operations.

The commission plans to release a decision within 30 calendar days from Dec. 8 concerning the rehabilitation plan.

The plan provides for a $150-million equity infusion and a comprehensive debt restructuring program seen to affect all of PAL's 9,000 creditors.

"The rehabilitation plan has been developed with the assumption of modest economy recovery over the next three to five years," PAL said in its proposed plan.

The PAL interim body which drafted the plan made these projections based on assumptions that PAL's fleet will be reduced to 22 planes from the original 54.

Although PAL has yet to find a strategic partner, the plan still provides for the possibility of an investor.

"Securing a strategic partner, most likely in the form of a foreign airline, has been, and continues to be a priority for PAL," it was noted in the plan.

"PAL remains committed to finding a strategic partner and continues to make concerted efforts to develop an acceptable agreement” with them.

PAL filed its debt relief petition with the SEC last June for debts amounting to $2.1 billion.

The government is considering tapping the $30-billion Miyazawa fund as a last resort in helping PAL, after the failed bid of Cathay Pacific to acquire a stake in the airline.

Finance Secretary Edgardo Espiritu yesterday said the government is providing assistance in finding other sources of financing for PAL. One of the possible sources is the Miyazawa fund, which was made available by the Japanese government to help Asian economies suffering from the regional crisis.

"Under the Miyazawa initiative, there is what you call a support for corporate debt restructuring. This has been done in other Asians countries like Thailand and Indonesia. We are looking at the possibility of making the restructuring of PAL, a part of the Miyazawa initiative," he said in a press briefing at the dignitaries' lounge of the Ninoy Aquino International Airport (NAIA), where the meeting of the Office of the President-Executive committee (OP-Excom) was held.

Mr. Espiritu noted the government has yet to send a formal request to the Japanese government, asking for a loan for PAL under the fund. The PAL management and the Securities and Exchange Commission (SEC) would still have to appraise such loan.

"We are looking at the $150-million requirement for PAL to become viable,” he said. PAL needs $150 million (about P6 billion) in fresh capital, which will finance the five-year rehabilitation plan.

Mr. Espiritu said the terms of the loan would still have to be negotiated with the Japanese government.

The government clarified that the Miyazawa fund should not be considered as a bailout since the government's fund, will not be funneled in PAL. However, the government would still have to guarantee the loan.

Still, the government has not yet lost hope in finding a strategic investor for PAL."We are looking at this option because the President does not want to close PAL," Mr. Espiritu said.

On the PAL-Cathay negotiations, Mr. Espiritu said the government would not just wait for Cathay to revive talks. "We are doing our own moves with regard to the restructuring of PAL."

Earlier, the Philippine government has already endorsed several projects worth $5.25 billion for funding under the Miyazawa fund. However, government's economic managers only expect projects worth $2-3 billion to be approved by the Japanese government. The Miyazawa fund is a fund set up by Japanese Finance Minister lichi Miyazawa last October. - With Cathy Rose A. Garcia